BASE PROSPECTUS
ACEA S.p.A.
(incorporated as a joint stock company (società per azioni) under the laws of the Republic of Italy)
€4,000,000,000
Euro Medium Term Note Programme
______
This Base Prospectus has been approved by the Luxembourg Commission de Surveillance du Secteur Financier (the "CSSF"), which is the Luxembourg competent authority for the purpose of Regulation (EU) No. 2017/1129 of 14 June 2017 (the "Prospectus Regulation") and relevant implementing measures in Luxembourg (loi du 16 juillet 2019 relative aux prospectus pour valeurs mobilières dated 16 July 2019, which implements the Prospectus Regulation (the "Luxembourg Prospectus Law")). This Base Prospectus constitutes a base prospectus for the purposes of the Prospectus Regulation and has been prepared for the purpose of giving information with regard to the issue of notes ("Notes") issued under the Euro Medium Term Note Programme (the "Programme") described in this Base Prospectus during the period of twelve months after the date hereof and will be published in electronic form on the website of the Luxembourg Stock Exchange (www.bourse.lu). The CSSF only approves this Base Prospectus as meeting the standards of completeness, comprehensibility and consistency imposed by the Prospectus Regulation. Such approval should not be considered as an endorsement of either the Issuer or the quality of the Notes that are the subject of this Base Prospectus and investors should make their own assessment as to the suitability of investing in the Notes. Such approval only relates to Notes which are to be admitted to trading on the regulated market of the Luxembourg Stock Exchange or other regulated markets for the purposes of Directive 2014/65/EU for a period of twelve months from the date of approval, provided that it is completed by any supplement, pursuant to Article 23 of the Prospectus Regulation. For the avoidance of doubt, the Issuer shall have no obligation to supplement this Base Prospectus in the event of significant new factors, material mistakes or material inaccuracies after the end of its 12-month validity period. The end of the validity of the Base Prospectus is 24 July 2021. Applications have been made for such Notes to be admitted during the period of twelve months after the date hereof to listing on the Official List and to trading on the regulated market of the Luxembourg Stock Exchange. The Programme also permits Notes to be issued on the basis that they will not be admitted to listing, trading and/or quotation by any competent authority, stock exchange and/or quotation system or to be admitted to listing, trading and/or quotation by such other or further competent authorities, stock exchanges and/or quotation systems as may be agreed with the Issuer. The CSSF assumes no responsibility with regard to the economic and financial soundness of any transaction under this Programme or the quality and solvency of the Issuer in accordance with the provisions of Article 6(4) of the Luxembourg Prospectus Law.
Acea S.p.A. (the "Issuer" or "Acea") may issue Notes under the Programme to one or more of the Dealers named on page 6 and any additional Dealer appointed under the Programme from time to time by the Issuer (each a "Dealer" and together the "Dealers") which appointment may be for a specific issue or on an ongoing basis. References in this Base Prospectus to the "relevant Dealer" shall be, in the case of an issue of Notes to more than one Dealer, to the lead manager of such issue and, in the case of an issue of Notes to one Dealer, to such Dealer. Pursuant to the Programme, the Issuer may issue Notes denominated in any currency agreed with the relevant Dealer, subject to any applicable legal or regulatory restrictions. The Notes will be issued in such denominations as may be agreed between the Issuer and the relevant Dealer save that the minimum denomination of each Note will be €100,000 (or, if the Notes are denominated in a currency other than euro, the equivalent amount in such currency). The aggregate nominal amount of all Notes from time to time outstanding under the Programme will not exceed €4,000,000,000 (or its equivalent in other currencies calculated as described herein).
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As of the date of this Base Prospectus, the Issuer has been assigned a rating of "Baa2" with a "stable outlook" by Moody’s Investors Service España, S.A. ("Moody’s") and "BBB+" with a "stable outlook" by Fitch Italia S.p.A. ("Fitch"). Each of Moody’s and Fitch is established in the European Economic Area ("EEA") and registered under Regulation (EC) No. 1060/2009, as amended (the "CRA Regulation"). Each of Moody’s and Fitch appears on the latest update of the list of registered credit rating agencies on the European Securities and Markets Authority ("ESMA") website at https://www.esma.europa.eu/supervision/credit-rating-agencies/risk.
A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency.
Investing in Notes issued under the Programme involves certain risks. The principal risk factors that may affect the abilities of the Issuer to fulfil its obligations under the Notes are discussed under "Risk Factors" below.
EU BENCHMARKS REGULATION – Interest and/or other amounts payable under floating rate notes may be calculated by reference to either the Euro Interbank Offered Rate ("EURIBOR") or the London Interbank Offered Rate ("LIBOR"), as specified in the relevant Final Terms (as defined below). As at the date of this Base Prospectus, EURIBOR is provided and administered by the European Money Markets Institute ("EMMI"), and LIBOR is provided and administered by ICE Benchmark Administration Limited ("ICE"). At the date of this Base Prospectus, EMMI and ICE are authorised as benchmark administrators, and included on the register of administrators and benchmarks established and maintained by the European Securities and Markets Authority ("ESMA") pursuant to article 36 of the Benchmark Regulation (Regulation (EU) 2016/1011) (the "BMR").
Arrangers
IMI – Intesa Sanpaolo BNP PARIBAS UniCredit Bank
Dealers
BBVA Barclays BNP PARIBAS Citigroup Crédit Agricole CIB Deutsche Bank Goldman Sachs International IMI – Intesa Sanpaolo MPS Capital Services Mediobanca Morgan Stanley Natixis Société Générale Corporate & Investment Banking UBI Banca UniCredit Bank
The date of this Base Prospectus is 24 July 2020
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CONTENTS
Page
IMPORTANT NOTICES ...... 1 GENERAL DESCRIPTION OF THE PROGRAMME ...... 8 RISK FACTORS ...... 14 INFORMATION INCORPORATED BY REFERENCE ...... 40 FINAL TERMS AND DRAWDOWN PROSPECTUSES ...... 43 FORMS OF THE NOTES ...... 44 TERMS AND CONDITIONS OF THE NOTES ...... 50 FORM OF FINAL TERMS ...... 86 OVERVIEW OF PROVISIONS RELATING TO THE NOTES WHILE IN GLOBAL FORM ...... 101 USE OF PROCEEDS ...... 103 DESCRIPTION OF THE ISSUER ...... 104 OVERVIEW OF FINANCIAL INFORMATION OF THE ISSUER ...... 152 REGULATORY ...... 157 TAXATION ...... 227 SUBSCRIPTION AND SALE ...... 240 GENERAL INFORMATION ...... 245
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IMPORTANT NOTICES
This Base Prospectus comprises a base prospectus in respect of all Notes issued under the Programme for the purposes of Article 8 of the Prospectus Regulation.
Responsibility for this Base Prospectus
The Issuer accepts responsibility for the information contained in this Base Prospectus and any Final Terms and declares that the information contained in this Base Prospectus is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import.
Final Terms/Drawdown Prospectus
Each Tranche (as defined herein) of Notes will be issued on the terms set out herein under "Terms and Conditions of the Notes" (the "Conditions") as completed by a document specific to such Tranche called final terms (the "Final Terms") or in a separate prospectus specific to such Tranche (the "Drawdown Prospectus") as described under "Final Terms and Drawdown Prospectuses" below.
Other relevant information
This Base Prospectus must be read and construed together with any supplements hereto and with any information incorporated by reference herein (see "Information Incorporated by Reference" below) and, in relation to any Tranche of Notes which is the subject of Final Terms, must be read and construed together with the relevant Final Terms. In the case of a Tranche of Notes which is the subject of a Drawdown Prospectus, each reference in this Base Prospectus to information being specified or identified in the relevant Final Terms shall be read and construed as a reference to such information being specified or identified in the relevant Drawdown Prospectus unless the context requires otherwise.
The Issuer has confirmed to the Dealers named under "Subscription and Sale" below that this Base Prospectus contains all information which is (in the context of the Programme, the issue, offering and sale of the Notes) material; that such information is true and accurate in all material respects and is not misleading in any material respect; that any opinions, predictions or intentions expressed herein are honestly held or made and are not misleading in any material respect; that this Base Prospectus does not omit to state any material fact necessary to make such information, opinions, predictions or intentions (in the context of the Programme, the issue, offering and sale of the Notes) not misleading in any material respect; and that all proper enquiries have been made to verify the foregoing.
Unauthorised information
No person has been authorised to give any information or to make any representation not contained in or not consistent with this Base Prospectus or any other document entered into in relation to the Programme or any information supplied by the Issuer or such other information as is in the public domain and, if given or made, such information or representation should not be relied upon as having been authorised by the Issuer or any Dealer.
Neither the Dealers nor any of their respective affiliates have authorised the whole or any part of this Base Prospectus and none of them makes any representation or warranty or accepts any responsibility as to the accuracy or completeness of the information contained in this Base
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Prospectus. Neither the delivery of this Base Prospectus or any Final Terms nor the issue, listing, offering, sale or delivery of any Note shall, in any circumstances, create any implication that the information contained in this Base Prospectus is true subsequent to the date hereof or the date upon which this Base Prospectus has been most recently amended or supplemented or that there has been no adverse change, or any event reasonably likely to involve any adverse change, in the prospects or financial or trading position of the Issuer since the date thereof or, if later, the date upon which this Base Prospectus has been most recently amended or supplemented or that any other information supplied in connection with the Programme is correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. The Dealers expressly do not undertake to review the financial condition or affairs of the Issuer during the life of the Programme or to advise any investor in the Notes of any information coming to their attention.
Restrictions on distribution
The distribution of this Base Prospectus and any Final Terms and the offering, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Base Prospectus or any Final Terms comes are required by the Issuer and the Dealers to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of Notes and on the distribution of this Base Prospectus or any Final Terms and other offering material relating to the Notes, see "Subscription and Sale". In particular, there are restrictions on the offer, sale and transfer of the Notes in the United States, the European Economic Area (including, France and the Republic of Italy), the United Kingdom, Singapore and Japan.
Notes have not been and will not be registered under the United States Securities Act of 1933 (as amended) (the "Securities Act") and are subject to U.S. tax law requirements. Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons as defined in Regulation S under the Securities Act except in certain transactions exempt from the registration requirements of the Securities Act. See “Subscription and Sale” below.
Neither this Base Prospectus nor any Final Terms constitutes an offer or an invitation to subscribe for or purchase any Notes and should not be considered as a recommendation by the Issuer, the Dealers or any of them that any recipient of this Base Prospectus or any Final Terms should subscribe for or purchase any Notes. Each recipient of this Base Prospectus or any Final Terms shall be taken to have made its own investigation and appraisal of the condition (financial or otherwise) of the Issuer.
IMPORTANT – EEA and UK Retail Investors
If the applicable Final Terms in respect of any Notes includes a legend entitled "Prohibition of Sales to EEA and UK Retail Investors", the Notes are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the European Economic Area ("EEA") or in the United Kingdom (“UK”). For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or (ii) a customer within the meaning of Directive (EU) 2016/97 (as amended, the “Insurance Distribution Directive”), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II. Consequently no key information document required by Regulation (EU) No. 1286/2014 (as amended, the “PRIIPs Regulation”) for
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offering or selling the Notes or otherwise making them available to retail investors in the EEA or in the UK has been prepared and therefore offering or selling the Notes or otherwise making them available to any retail investor in the EEA or in the UK may be unlawful under the PRIIPs Regulation.
MiFID II product governance / target market – The Final Terms in respect of any Notes will include a legend entitled "MiFID II Product Governance" which will outline the target market assessment in respect of the Notes and which channels for distribution of the Notes are appropriate. Any person subsequently offering, selling or recommending the Notes (a distributor) should take into consideration the target market assessment; however, a distributor subject to MiFID II is responsible for undertaking its own target market assessment in respect of the Notes (by either adopting or refining the target market assessment) and determining appropriate distribution channels.
A determination will be made in relation to each issue about whether, for the purpose of the MiFID Product Governance rules under EU Delegated Directive 2017/593 (the "MiFID Product Governance Rules"), any Dealer subscribing for any Notes is a manufacturer in respect of such Notes, but otherwise neither the Arranger nor the Dealers nor any of their respective affiliates will be a manufacturer for the purpose of the MIFID Product Governance Rules.
The Notes may not be a suitable investment for all investors: Each potential investor in the Notes must determine the suitability of that investment in the light of its own circumstances. In particular, each potential investor should:
(a) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained or incorporated by reference in this Base Prospectus or any applicable supplement;
(b) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;
(c) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor’s currency;
(d) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant indices and financial markets; and
(e) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
Some Notes are complex financial instruments. Sophisticated institutional investors generally do not purchase complex financial instruments as stand-alone investments. They purchase complex financial instruments as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in Notes which are complex financial instruments unless it has the expertise (either alone or with a financial adviser) to evaluate how the Notes will perform under changing
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conditions, the resulting effects on the value of the Notes and the impact this investment will have on the potential investor’s overall investment portfolio.
Legal investment considerations may restrict certain investments: The investment activities of certain investors are subject to investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of the Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.
PRODUCT CLASSIFICATION PURSUANT TO SECTION 309B OF THE SECURITIES AND FUTURES ACT (CHAPTER 289 OF SINGAPORE)
The Final Terms in respect of any Notes may include a legend entitled "Singapore Securities and Futures Act Product Classification" which will state the product classification of the Notes pursuant to section 309B(1) of the Securities and Futures Act (Chapter 289 of Singapore) (the "SFA").
The Issuer will make a determination in relation to each issue about the classification of the Notes being offered for purposes of section 309B(1)(a). Any such legend included on the relevant Final Terms will constitute notice to "relevant persons" for purposes of section 309B(1)(c) of the SFA.
Programme limit
The maximum aggregate principal amount of Notes outstanding and guaranteed at any one time under the Programme will not exceed €4,000,000,000 and for this purpose, any Notes denominated in another currency shall be translated into euro at the date of the agreement to issue such Notes (calculated in accordance with the provisions of the Dealer Agreement). The maximum aggregate principal amount of Notes which may be outstanding and guaranteed at any one time under the Programme may be increased from time to time, subject to compliance with the relevant provisions of the Dealer Agreement as defined under "Subscription and Sale".
Certain definitions
In this Base Prospectus, unless otherwise specified, references to a "Member State" are references to a Member State of the European Economic Area, references to "Euro" or "€" are to the currency introduced at the start of the third stage of European economic and monetary union, and as defined in Article 2 of Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro, as amended.
The language of this Base Prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.
Certain figures included in this Base Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
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Websites
In this Base Prospectus, references to websites are included for information purposes only. The contents of any websites (except for the documents (or portions thereof) incorporated by reference into this Base Prospectus to the extent set out on any such website) referenced in this Base Prospectus do not constitute a part of or are incorporated into this Base Prospectus and have not been scrutinised or approved by the CSSF.
Ratings
Tranches of Notes issued under the Programme will be rated or unrated. Where a Tranche of Notes is rated, such rating will not necessarily be the same as the rating(s) described above, elsewhere in this Base Prospectus or the rating(s) assigned to Notes already issued. Where a Tranche of Notes is rated, the applicable rating(s) will be specified in the relevant Final Terms. Whether or not each credit rating applied for in relation to a relevant Tranche of Notes will be (1) issued by a credit rating agency established in the EEA or in the UK and registered (or which has applied for registration and not been refused) under the CRA Regulation, or (2) issued by a credit rating agency which is not established in the EEA or in the UK but will be endorsed by a CRA which is established in the EEA or in the UK and registered under the CRA Regulation or (3) issued by a credit rating agency which is not established in the EEA or in the UK but which is certified under the CRA Regulation will be disclosed in the Final Terms. In general, European regulated investors are restricted from using a rating for regulatory purposes if such rating is not issued by a credit rating agency established in the EEA or in the UK and registered under the CRA Regulation unless (1) the rating is provided by a credit rating agency operating in the EEA before 7 June 2010 which has submitted an application for registration in accordance with the CRA Regulation and such registration has not been refused, or (2) the rating is provided by a credit rating agency not established in the EEA or in the UK but is endorsed by a credit rating agency established in the EEA or in the United Kingdom and registered under the CRA Regulation or (3) the rating is provided by a credit rating agency not established in the EEA or in the UK which is certified under the CRA Regulation.
Alternative Performance Measures
In order to better evaluate Acea’s financial information incorporated by reference in the Base Prospectus, management has identified several Alternative Performance Measures (“APMs”). Management believes that these APMs provide additional useful information for investors to analyse the Acea Group’s financial position, financial performance and cash flows, because they may further facilitate the identification of significant operating trends and financial parameters. On 5 October 2015, ESMA (European Securities and Markets Authority) published its guidelines (ESMA/2015/1415) on criteria for the presentation of alternative performance indicators (the “ESMA APM Guidelines”) which replace, as of 3 July 2016, CESR/05-178b recommendations. This orientation was acknowledged in our system in CONSOB Communication no. 0092543 dated 3 December 2015. In particular, the following APMs as defined in the ESMA APM Guidelines are used by the management of the Issuer to monitor the Acea Group’s financial and operating performance and are disclosed in this Base Prospectus in the sections “Risk Factors”, “Description of the Issuer” and in the 2019 Financial Statements, the 2018 Financial Statements and the Q1 2020 Press Release (which are incorporated by reference into this Base Prospectus):
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• for the Acea Group, the gross operating profit (or EBITDA) is a key operating performance indicator and, from 1 January 2014, includes the condensed result of equity investments in jointly controlled entities for which the consolidation method changed when international accounting standards for financial reporting IFRS 10 and IFRS 11 came into force. EBITDA is determined by adding the Operative Result to “Amortisation, depreciation, provisions and impairment”, insofar as these are the main non-cash items; • the net financial position is an indicator of the Acea Group’s financial structure, the sum of Non-current borrowings and Financial liabilities (excluding payables arising as a result of certain acquisitions during the year) net of Non-current financial assets (financial receivables excluding a part of receivables related to Acea S.p.A.’s IFRIC 12 and securities other than equity investments), Current borrowings and Other current financial liabilities net of Current financial assets (including the Euro 16.2 million in receivables due from the Italian Antitrust Authority resulting from the cancellation of an administrative fine) and Cash and cash equivalents; • net invested capital is the sum of “Current assets”, “Non-current assets” and Assets and Liabilities held for sale, less “Current liabilities” and “Non-current liabilities”, excluding items taken into account when calculating the net financial position; and • net working capital is the sum of the current receivables, inventories, the net balance of other current assets and liabilities and current debts, excluding the items considered in calculating the net financial position. It should be noted that: i. the APMs are based exclusively on Acea data and are not indicative of future performance; ii. the APMs are not prepared in accordance with IFRS and are not subject to audit; they are derived from the financial information of Acea for the relevant periods presented; iii. the APMs are non-IFRS financial measures and are not recognised as measures of financial position, financial performance or liquidity under IFRS, and they should not be considered as substitutes to performance measures prepared in accordance with IFRS or any other generally accepted accounting principles; and iv. the APMs should be read together with the financial statements of Acea for the relevant periods to which the APMs relate. Since not all companies calculate APMs in an identical manner, the APMs used by Acea may not be consistent or comparable with similar measures used by other companies. Therefore, undue reliance should not be placed on these measures. Stabilisation
In connection with the issue of any Tranche of Notes, the Dealer or Dealers (if any) named as the Stabilising Manager(s) (or persons acting on behalf of any Stabilising Manager(s)) in the applicable Final Terms may over allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, stabilisation may not necessarily occur. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the relevant Tranche of Notes is made and, if begun, may cease at any time, but it must end no later than the earlier of 30 days after the issue date of the relevant Tranche of
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Notes and 60 days after the date of the allotment of the relevant Tranche of Notes. Any stabilisation action or over-allotment must be conducted by the relevant Stabilising Manager(s) (or person(s) acting on behalf of any Stabilising Manager(s)) in accordance with all applicable laws and rules.
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GENERAL DESCRIPTION OF THE PROGRAMME
The following overview does not purport to be complete and is taken from, and is qualified in its entirety by, the remainder of this Base Prospectus and, in relation to the terms and conditions of any particular Tranche of Notes, the applicable Final Terms. The Issuer may agree with any Dealer that Notes may be issued in a form not contemplated by the Terms and Conditions of the Notes herein, in which event a supplement to the Base Prospectus, if appropriate, or a drawdown prospectus or a new base prospectus will be made available which will describe the effect of the agreement reached in relation to such Notes.
This overview constitutes a general description of the Programme for the purposes of Article 25 of Commission Regulation (EU) No 2019/980.
Words and expressions defined in "Form of the Notes" and "Terms and Conditions of the Notes" shall have the same meanings in this section.
Issuer: Acea S.p.A.
Issuer’s Legal Entity 549300Q3448N041CTH56 Identifier: Risk Factors: There are certain factors that may affect the Issuer’s ability to fulfil its obligations under the Notes issued under the Programme. These are set out under "Risk Factors" below. In addition, there are certain factors which are material for the purpose of assessing the market risks associated with Notes issued under the Programme. These are set out under "Risk Factors" and include certain risks relating to the structure of particular Series of Notes and certain market risks. Description: Euro Medium Term Note Programme Joint Arrangers: BNP Paribas Intesa Sanpaolo S.p.A UniCredit Bank AG Dealers: Banco Bilbao Vizcaya Argentaria, S.A. Barclays Bank Ireland PLC Barclays Bank PLC BNP Paribas Citigroup Global Markets Europe AG Citigroup Global Markets Limited Crédit Agricole Corporate and Investment Bank Deutsche Bank Aktiengesellscaft Goldman Sachs International Intesa Sanpaolo S.p.A Mediobanca – Banca Di Credito Finanziario S.p.A. MPS Capital Services Banca per le Imprese S.p.A. Morgan Stanley & Co. International plc Natixis Société Générale Unione di Banche Italiane S.p.A.
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UniCredit Bank AG and any other Dealers appointed in accordance with the Dealer Agreement (as defined in "Subscription and Sale" below). Certain Restrictions: Each issue of Notes denominated in a currency in respect of which particular laws, guidelines, regulations, restrictions or reporting requirements apply will only be issued in circumstances which comply with such laws, guidelines, regulations, restrictions or reporting requirements from time to time (see "Subscription and Sale") including the following restrictions applicable at the date of this Base Prospectus. Notes having a maturity of less than one year Where Notes have a maturity of less than one year and either (a) the issue proceeds are received by the Issuer in the United Kingdom or (b) the activity of issuing the Notes is carried on from an establishment maintained by the Issuer in the United Kingdom, such Notes must: (i) have a minimum redemption value of £100,000 (or its equivalent in other currencies) and be issued only to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses; or (ii) be issued in other circumstances which do not constitute a contravention of section 19 of the Financial Services and Markets Act 2000 by the Issuer. Fiscal Agent and Paying BNP Paribas Securities Services, Luxembourg Branch Agent: Listing Agent: BNP Paribas Securities Services, Luxembourg Branch Programme Size: Up to €4,000,000,000 (or its equivalent in other currencies calculated as described in the Dealer Agreement) outstanding at any time. The Issuer may increase the amount of the Programme in accordance with the terms of the Dealer Agreement. Distribution: Notes may be distributed by way of private or public placement and in each case on a syndicated or non-syndicated basis. Currencies: Subject to any applicable legal and/or regulatory restrictions, Notes may be denominated in any currency agreed between the Issuer and the relevant Dealer and as stated in the applicable Final Terms. Maturities: The Notes will have such maturities as may be agreed between the Issuer and the relevant Dealer, subject to such minimum or maximum maturities as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the Issuer or the relevant Specified Currency.
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Issue Price: Notes may be issued on a fully-paid basis and at an issue price which is at par or at a discount to, or premium over, par, as specified in the applicable Final Terms. Form of Notes: The Notes will be issued in bearer form, as described in "Form of the Notes" below. Fixed Rate Notes: Fixed interest will be payable on such date or dates as may be agreed between the Issuer and the relevant Dealer and on redemption and will be calculated on such basis as may be specified in the applicable Final Terms. Floating Rate Notes: Floating Rate Notes will bear interest at a rate determined: (a) on the same basis as the floating rate under a notional interest rate swap transaction in the relevant Specified Currency governed by an agreement incorporating the 2006 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc., and as amended and updated as at the Issue Date of the first Tranche of the Notes of the relevant Series); or (b) on the basis of the reference rate set out in the applicable Final Terms. The margin (if any) relating to such floating rate will be agreed between the Issuer and the relevant Dealer for each Series of Floating Rate Notes. Floating Rate Notes may also have a maximum interest rate, a minimum interest rate or both. Benchmark Replacement: Interest on Floating Rate Notes in respect of each Interest Period, as agreed prior to issue by the Issuer and the relevant Dealer, will be payable on such Interest Payment Dates, and will be calculated on such basis as may be specified in the applicable Final Terms.
If a Benchmark Event (as defined below) occurs in relation to the reference rate of the Floating Rate Notes, pursuant to condition 7(i) (Benchmark Replacement), the Issuer shall use all reasonable endeavours to appoint an Independent Adviser, as soon as reasonably practicable, to determine a Successor Reference Rate or, failing that, an Alternative Reference Rate. If the Independent Adviser is unable to determine an Alternative Reference Rate prior to the relevant cut-off date, the Issuer, taking into account any relevant and applicable market precedents and published guidance, may determine an Alternative Reference Rate, all as described in condition 7(i) (Benchmark Replacement).
Fixed to Floating or Interest may initially accrue at a fixed rate, and then switch to Floating to Fixed Rate a floating rate, or interest may initially accrue at a floating rate Notes: and then switch to a fixed rate.
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Zero Coupon Notes: Zero Coupon Notes will be offered and sold at a discount to their nominal amount and will not bear interest, in each case as may be agreed between the Issuer and the relevant Dealer and as specified in the applicable Final Terms. Redemption: The applicable Final Terms will indicate either that the relevant Notes cannot be redeemed prior to their stated maturity (other than for taxation reasons, upon a Change of Control or following an Event of Default) or that such Notes will be redeemable at the option of the Issuer upon giving notice to the Noteholders and/or at the option of the Noteholders upon giving notice to the Issuer, on a date or dates specified prior to such stated maturity and at a price or prices and on such other terms as may be agreed between the Issuer and the relevant Dealer. The applicable Final Terms will also indicate whether the Issuer has a Clean-up Call Option. Notes having a maturity of less than one year may be subject to restrictions on their denomination and distribution, see "Certain Restrictions — Notes having a maturity of less than one year" above. Denomination of Notes: The Notes will be issued in such denominations as may be agreed between the Issuer and the relevant Dealer save that the minimum denomination of each Note will be such amount as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the relevant Specified Currency (see "Certain Restrictions — Notes having a maturity of less than one year" above) and save that the minimum denomination of each Note will be €100,000 (or, if the Notes are denominated in a currency other than euro, the equivalent amount in such currency). If the Final Terms so specify, Notes may be issued in denominations of €100,000 and integral multiples of €1,000 in excess thereof up to and including €199,000. Taxation: All payments in respect of the Notes will be made without deduction for or on account of withholding taxes imposed by the Relevant Jurisdiction as provided in Condition 11 (Taxation). In the event that any such deduction is made, the Issuer will, save in certain limited circumstances provided in Condition 11 (Taxation), be required to pay additional amounts to cover the amounts so deducted. Negative Pledge: The terms of the Notes will contain a negative pledge provision as further described in Condition 5 (Negative Pledge). Cross Default: The terms of the Notes will contain a cross default provision as further described in Condition 12(c) (Events of Default – Cross-default of Issuer or Subsidiary). Status of the Notes: The Notes will constitute direct, general and unconditional obligations of the Issuer and will at all times rank pari passu
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among themselves and at least pari passu with all other present and future unsecured obligations of the Issuer, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application. Rating: Notes issued under the Programme may be rated or unrated. Where a Series of Notes is rated, such rating will be disclosed in the applicable Final Terms and will not necessarily be the same as the ratings assigned to other Notes issued under the Programme. A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. Whether or not each credit rating applied for in relation to the relevant Series of Notes will be (1) issued by a credit rating agency established in the EEA or in the UK and registered under the CRA Regulation, or (2) issued by a credit rating agency which is not established in the EEA or in the UK but will be endorsed by a credit rating agency which is established in the EEA or in the UK and registered under the CRA Regulation or (3) issued by a credit rating agency which is not established in the EEA or in the UK but which is certified under the CRA Regulation, will be disclosed in the Final Terms. In general, European regulated investors are restricted from using a rating for regulatory purposes if such rating is not issued by a credit rating agency established in the EEA or in the UK and registered under the CRA Regulation unless (1) the rating is provided by a credit rating agency not established in the EEA or in the UK but is endorsed by a credit rating agency established in the EEA or in the UK and registered under the CRA Regulation or (2) the rating is provided by a credit rating agency not established in the EEA or in the UK which is certified under the CRA Regulation. The list of registered and certified rating agencies published by the European Securities and Markets Authority ("ESMA") on its website in accordance with the CRA Regulation is not conclusive evidence of the status of the relevant rating agency included in such list, as there may be delays between certain supervisory measures being taken against a relevant rating agency and the publication of the updated ESMA list. Approval, Admission to This Base Prospectus has been approved by the CSSF. Trading and Listing: Application has also been made for Notes issued under the Programme to be admitted to trading on the regulated market of the Luxembourg Stock Exchange and to be listed on the Official List of the Luxembourg Stock Exchange. Such approval only relates to Notes which are to be admitted to trading on the regulated market of the Luxembourg Stock
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Exchange or other regulated markets for the purposes of Directive 2014/65/EU. Notes may be listed or admitted to trading, as the case may be, on other or further stock exchanges or markets agreed between the Issuer and the relevant Dealer in relation to the Series. Notes which are neither listed nor admitted to trading on any market may also be issued. The applicable Final Terms will state whether or not the relevant Notes are to be listed and/or admitted to trading and, if so, on which stock exchanges and/or markets. Pursuant to Article 25 of the Prospectus Regulation, the CSSF may at the request of the Issuer, send to the competent authority of another European Economic Area Member State and the ESMA (i) a copy of this Prospectus; and (ii) a certificate of approval attesting that this Prospectus has been drawn up in accordance with the Prospectus Regulation (an "Attestation Certificate"). Governing Law: The Notes and any non-contractual obligations arising out of or in connection with the Notes will be governed by and shall be construed in accordance with English law. Condition 16 (Meetings of Noteholders; Noteholders’ Representative; Modification and Waiver) and the provisions of the Agency Agreement concerning the meetings of Noteholders and the appointment of a Noteholders’ Representative in respect of the Notes are subject to compliance with the laws of the Republic of Italy. Selling Restrictions: There are restrictions on the offer, sale and transfer of the Notes in the United States, the European Economic Area (including France and the Republic of Italy), the United Kingdom, Singapore, Japan and such other restrictions as may be required in connection with the offering and sale of a particular Tranche of Notes, see "Subscription and Sale". United States Selling Regulation S, Category 2. TEFRA C or D applicable/TEFRA Restrictions: not applicable, as specified in the applicable Final Terms.
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RISK FACTORS
The Issuer believes that the following risk factors may affect its ability to fulfil its obligations under Notes issued under the Programme. All of these risk factors are contingencies which may or may not occur. In addition, risk factors which are material for the purpose of assessing the market risks associated with Notes issued under the Programme are also described below.
The Issuer believes that the risk factors described below represent the principal risks inherent in investing in Notes issued under the Programme, but the inability of the Issuer to pay interest, principal or other amounts on or in connection with Notes issued under the Programme may occur for other reasons which may not be considered significant risks by the Issuer based on information currently available to it or which it may not currently be able to anticipate. Prospective investors should also read the detailed information set out elsewhere in this Base Prospectus (including, without limitation, any documents incorporated by reference herein) and reach their own views prior to making any investment decision, based upon their own judgment and upon advice from such financial, legal and tax advisers as they have deemed necessary.
Words and expressions defined in "Terms and Conditions of the Notes", or elsewhere in this Base Prospectus have the same meaning in this section. Prospective investors should read the entire Base Prospectus.
FACTORS THAT MAY AFFECT THE ISSUER’S ABILITY TO FULFIL ITS OBLIGATIONS UNDER THE NOTES
Risks relating to the Group’s financial situation
Risks related to the impact of the global financial crisis
The performance of the Group is influenced by Italian and international macroeconomic conditions and the conditions of the financial markets in general, and in particular, by the stability and trends in the economies of Italy and the other geographical areas in which the Group conducts its activity.
A number of uncertainties remain in the current macroeconomic environment, namely: (a) the COVID-19 impact on global growth and individual countries; (b) trends in the economy and the prospects of recovery and consolidation of the economies of countries like the US and China, which have shown consistent growth in recent years; (c) the outcome of the commercial dispute between the US and China, which could have an effect on international trade and therefore global production; (d) future development of the European Central Bank’s ("ECB") monetary policy in the Euro area, the Federal Reserve System, and in the Dollar area, and the policies implemented by other countries aimed at promoting competitive devaluations of their currencies; (e) the sustainability of the sovereign debt of certain countries and related recurring tensions on the financial markets; and (f) the consequences and potential lingering uncertainties caused by the Brexit vote and its subsequent withdrawal from the European Union on 31 January 2020.
In addition, the global economy, the condition of the financial markets, adverse macroeconomic developments in the Group’s primary markets and any future sovereign debt crisis in Europe may all significantly influence the Group’s performance. The Group’s earning
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capacity and stability can be affected by the overall economic situation and by the dynamics of the financial markets.
All of these factors, in particular in times of economic and financial crisis, could result in an increase in the Issuer’s and/or the Group’s borrowing costs, in a reduction of, or reduced growth in the Issuer’s and/or the Group’s ordinary business, in the decline in the Issuer’s and/or the Group’s asset values, which could have an adverse impact on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The changes to the overall economic situation caused by the economic crisis could have a significant adverse impact on the Group’s businesses and their profitability
The economy in Italy, the Group’s principal market, has been affected in recent years by a significant slowdown and also by significant increases in energy prices, resulting in an increased focus on energy saving, as well as an increased focus in terms of legislative and regulatory policies. More recently, the containment measures taken in Italy to tackle the COVID-19 outbreak, are significantly reducing economic activity and a substantial prolongation of such measures could result in local, regional or national recessions. The Issuer expects that, in the near future, demand for energy may remain below the levels observed before the economic crisis. In addition, the decrease in demand for energy has put pressure on sales margins also due to greater competition. If demand continues to be negatively affected or if there is another reversal in demand without corresponding adjustments in the margins charged by the Group on its sales or without increases in its market share, then the Group’s revenues would be reduced and future growth prospects would be limited. This could adversely affect the Group’s business, results of operations and financial condition and those of its Group, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
In addition, changes in retail electricity consumption could require the Group to acquire or sell additional electricity on unfavourable terms. Consumption may vary substantially according to factors outside of the Group’s control, such as overall economic activity and the weather. Sales volumes may differ from the supply volumes that the Group had expected to utilise from electricity purchase contracts. Differences between actual sales volumes and supply volumes may require the Group to purchase additional electricity or sell excess electricity, both of which are themselves subject to market conditions, which may change according to multiple factors, including weather, plant availability, transmission congestion and input fuel costs. The purchase of additional electricity at high prices or sale of excess electricity at low prices could adversely affect the business, results of operations and financial condition of the Issuer and its Group, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
Risks related to national and international political instability
The dynamics described in the previous paragraphs and the consequent effects on the Issuer’s activities are influenced by the international and Italian socioeconomic context and its impact on financial markets.
Italy is the Issuer’s primary market and its business is therefore sensitive to adverse macroeconomic and political conditions in Italy.
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A return to declining or stagnating GDP (also as a result of the COVID-19 pandemic), increasing or stagnating unemployment and poor conditions in the capital markets in Italy could decrease consumer confidence and investment and may cause a reduction in demand for our services. Any of the foregoing could have an adverse effect on the business, results of operations and financial condition of the Issuer and its Group.
One of the elements creating economic uncertainty is the political situation in Italy. Several government crises, internal divisions and alliances between political parties led to the formation of the so-called “Conte bis” government on 5 September 2019. The political developments in Italy have recently caused a volatility in the value of Italian government securities and a corresponding volatility in the risk premium to be paid by the Italian government on its debt compared to other benchmark securities.
The economic implications of the policies of the Italian government remain uncertain. Political instability, if material, could negatively affect the country’s economic recovery and could affect the ability of the Group to generate revenues, and it cannot be ruled out that such could have a material adverse effect on the business, results of operations and financial condition of the Issuer and its Group.
Risks related to the structure of the Group
The Issuer’s business is conducted through direct and indirect subsidiaries. All corporate and staff services are fully centralised at parent company level whereas sector-specific technical and commercial expertise is mainly held at the operating subsidiary level. Therefore, the Issuer has service contracts which are periodically updated and priced at market value with all its subsidiaries that formally set forth the intercompany relationships and also implement a cash- pooling system which enables the Group to optimise the use of surplus funds of all subsidiaries in the Group in order to reduce external debt and increase liquidity.
Any reduction or delay in such payments could have an adverse effect on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Issuer’s subsidiaries have no obligation, contingent or otherwise, to pay any amounts due under the Notes or to make funds available to the Issuer to enable it to pay any amounts due under the Notes.
The Issuer’s subsidiaries have other liabilities, including contingent liabilities. Generally, creditors of a subsidiary, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by the relevant subsidiary and preferred shareholders, if any, of the subsidiary, will be entitled to the assets of that subsidiary before any of those assets can be distributed to shareholders upon liquidation or winding up. As a result, the Issuer’s obligations under the Notes issued by it will be structurally subordinated to the prior payment of all debts and other liabilities of the Issuer’s direct and indirect subsidiaries. Therefore, the Issuer may be unable to make required principal and interest payments on the Notes and the Issuer may not have sufficient funds available to make payments to the holders of the Notes.
The Group is subject to interest rate risk arising on its financial indebtedness
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The Group is subject to interest rate risk arising on its financial indebtedness, which varies depending on whether such indebtedness is fixed or floating rate. The Group manages its interest rate risk through the periodic analysis and control of positions based on its specific needs, in order to stabilise funding costs and cash flows and meet margin targets. Such interest rate risk management involves a daily activity in the markets in order to hedge the relevant exposure in the medium/long term, and not for trading purposes. There can be no guarantee that the hedging policy adopted by the Group, which is designed to minimise any losses connected to fluctuations in interest rates in the case of floating rate indebtedness by transforming them into fixed rate indebtedness, will actually have the effect of reducing any such losses. To the extent it does not, this could adversely affect the Group’s business, results of operations and financial condition, with a consequential adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
A downgrade of the Issuer’s credit ratings may impact its funding ability
As of the date hereof, the Issuer’s long-term credit rating is Baa2 with a "stable outlook" from Moody’s Investors Service España, S.A. ("Moody’s") and BBB+ with a "stable outlook" from Fitch Italia S.p.A. ("Fitch").
Moody’s and Fitch are established in the European Union and are registered under the CRA Regulation. As such, Fitch and Moody’s are included in the list of credit ratings agencies published by the ESMA on its website available (www.esma.europa.eu/page/List-registered- and-certified-CRAs) in accordance with the CRA Regulation.
The Issuer’s future ability to access the capital markets, other financing instruments and related costs may depend, inter alia, on the rating assigned to the Issuer.
Accordingly, a downgrade of any the ratings of the Issuer as well as a downgrade of the sovereign credit rating of Italy may result in higher funding and refinancing costs for the Group in the capital markets, which in turn may have an adverse impact on the Group’s competitive position, and may have an adverse effect on the Group’s standing in the market. This could adversely affect the Group’s business, results of operations and financial condition, which in turn could have an adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
Risks relating to the Group’s business activities and industry
The Group is dependent on concessions from local authorities for its regulated activities
For the financial year ended 31 December 2019, the Group’s regulated activities (integrated water services, distribution of electricity and public lighting) accounted for approximately 82 per cent. of the Group’s EBITDA.
The regulated activities (integrated water services, distribution of electricity and public lighting) are dependent on concessions from local authorities that vary in duration across the Group’s business areas.
In the case of expiry of a concession at its stated maturity date as well as in the case of early termination for any reason (including the failure by a concession holder to fulfil its material obligations under its concession), each concession holder must continue to operate the
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concession until it is replaced by the new incoming concession holder. Each concession is governed by agreements with the relevant grantor requiring the relevant concession holder to comply with certain obligations (including performing regular maintenance). Each concession holder is subject to penalties or sanctions for non-performance or default under the relevant concession. Failure by a concession holder to fulfil its material obligations under a concession could, if such failure is left not remedied, lead to early termination by the grantor of the concession. Furthermore, in accordance with general principles of Italian law, a concession can be terminated early for reasons of public interest. In either case, the relevant concession holder might be required to transfer all of the assets relating to the operation of the concession to the grantor or to the incoming concession holder. However, in the case of early termination of a concession, the concession holder might be entitled to receive a compensation amount determined in accordance with the terms of the relevant concession-agreement.
Law No. 164 of 11 November 2014 (the so-called Legge "Sblocca Italia") introduced material new provisions concerning the valorisation of assets in case of succession among integrated water services concession holders, by providing that the exiting concession holder will be entitled to the final value of the managed assets net of any amortisations, in accordance with the procedures and the criteria set forth by the relevant regulator (ARERA).
Legislation in Italy could also affect the expiry date of certain concessions. See "The evolution in the legislative and regulatory context for the electricity, waste and water sectors poses a risk to the Issuer" below.
With respect to the waste regulatory framework, in 2019 ARERA introduced new rules (following an extensive consultation process involving all the stakeholders) to determine the waste disposal fees (TARI) applicable to end users in 2020-2021, the criteria for the costs recorded in the 2018-2019 two-year period and the disclosure obligations. The introduction of these new rules represented a preliminary step to implement the new tariff method for the integrated waste management service and actually does not include the tariff regulation for the treatment, recovery and disposal of urban waste. In the next regulatory period, ARERA will complete the method introducing the tariff regulation on treatment and disposal. As Acea is an operator of the waste treatment and disposal phase, which has not been regulated yet, the full implications of the new regulatory framework on its waste business will be clear only after the ARERA's publication of the first guidelines applicable to it.
No assurances can be given that the Group will be able to enter into new contracts for carrying out the businesses described above after the expiration of the current contracts, or that any new contracts entered into or renewals of existing contracts will provide for similar terms to those currently in force. The Group’s failure to enter into new contracts or renew existing contracts, in each case on similar or otherwise favourable terms, could result in a decrease in revenues and, as a consequence, could have an adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Issuer may incur costs in re-tendering for large hydroelectric concessions
By way of Law Decree No. 83 of 22 June 2012 (the so-called "Development Decree"), the government issued certain regulations designed to facilitate the way in which tenders are carried out. More specifically, Article 37 of the Development Decree provides that five years prior to the expiration of a large hydroelectric concession, the competent authority shall launch a public tender for the assignment, subject to the payment of consideration, of such large hydroelectric concession, in accordance with local regulations and the fundamental principles
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of competition protection, freedom of establishment, transparency and non-discrimination. Such new concession shall be for a period of 20 years, up to a maximum of 30 years, depending on the required level of investment. The criteria taken into consideration in assigning the concession shall be principally the pecuniary offer made in order to acquire the use of the water resources and the commitment to increase the installed power or the energy produced, and shall also include the improvement and environmental restoration of the relevant catchment area, the territorial compensation measures and the extent and quality of the plan of action set out in order to ensure conservation of the reservoirs’ capacity.
In addition, in relation to large hydroelectric concessions which have either already expired or are due to expire before 31 December 2018 (in relation to which the aforementioned five-year limit would not be applicable), the new provisions have established a special transitional regime, under which the relevant tenders must be called within two years of the effective date of the implementing ministerial decree (under Article 12, paragraph 2 of Legislative Decree No. 79 of 16 March 1999), and the new concession will start at the end of the fifth year following the original expiry date and in any case no later than 31 December 2017.
During the current legislature the Legislative Decree n. 135/2018 made changes to the discipline of concessions for large hydroelectric derivations, arranging the regionalization of ownership of hydroelectric works at the expiry of the concessions and in the event of forfeiture or renunciation of the same.
Regions are required to regulate, by law, the procedures and procedures for assignment. The deadline for the adoption of this regulation set at March 31, 2020 has been extended to October 31, 2020 by article 125-bis of Legislative Decree n. 18/2020 (converted with amendments into Law no. 27/2020), in relation to the state of emergency declared following the epidemiological spread of COVID-19.
Regional law must comply with certain predefined legislative parameters. Among them, the duration of the new concessions, between 20 and 40 years, which can be increased up to a maximum of 10 years, in relation to the complexity of the project proposal presented and the amount of the investment. The procedures for awarding new concessions must be started within two years from the entry into force of the regional law. In the event of non-compliance with the start-up deadline by the region concerned, the exercise of replacement powers by the State is envisaged.
In the last two years Acea Produzione, a subsidiary active in the power generation field, participated on behalf of the Group in a discussion between the institutions and the main power generation association on the rules governing the agreement between the outgoing concession holder and the new operator.
In order to obtain new business, the Group may participate in competitive tender processes, which entail competition on price levels, and margins that could be lower than past practice or what the Group would consider generally acceptable.
The Group currently holds nine hydroelectric concessions, for a total installed capacity of approximately 120 MW, maturing between 2015 and 2026. Should the Group be required to re-tender for large hydroelectric concessions, this could result in the Group losing the hydroelectric concessions or incurring significant costs in the tender process, either of which could have an adverse impact on the Group’s business, results of operations and financial
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condition, with a consequential adverse impact on the market value of the Notes and/or the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at maturity.
The Group is exposed to revisions of tariffs in water and energy sectors
The ACEA Group mainly operates in regulated markets. Changes to rules in these markets, as well as regulations and obligations, can have a significant effect on the Group’s results and operating performance. Therefore, the Group is exposed to a risk of variation in the tariffs applied to end users.
In 2011, Law Decree No. 201 of 6 December 2011 (the "Save Italy Decree") ordered the abolition of the national agency for regulating and supervising water matters, providing that the related functions and intrinsic financial and instrumental resources should be transferred to the ARERA and the Ministry for the Environment.
Following this change in legislation, in the water sectors, the tariffs payable by customers (as proposed by the competent district authorities within each district) must be approved by the ARERA. Through Resolution No. 654/2015/R/eel, the ARERA approved the applicable tariff method for the fifth regulatory period commencing on 1 January 2016.
Territorial and governance regulations relating to the integrated water service were affected by specific amendments in 2014 by Legislative Decree 133/2014 (the "Unlock Italy Decree") and Law 147/2013 (the "Stability Law") as well as in 2015 mainly with reference to the reorganisation of local public service regulations of economic relevance (Madia Reform) and the environment with the so-called Green Economy Annex.
In 2015, there was a period of intense confrontation between operators and the ARERA for the formulation of the new tariff rules for the years 2016 onwards. The new tariff methods were established by Resolution 664/2015/R/Idr (M1/MTI2) for the water sector and Resolution 654/2015/R/eel for the electricity sector.
As explained in more detail below, these resolutions modified some of the most important reference elements needed to build the new tariff determinations, such as the recognition for the cost of capital invested and other specific tariff items.
Despite ARERA’s intentions to provide new methods with greater stability and clarity, some of the new guidance has increased tariffs, regulatory risk and unpredictability. The Issuer has represented, through legal appeal, its willingness to protect its business and create value for its stakeholders in relation to the more controversial aspects of the new tariff regulation, especially with reference to water regulation.
The two new tariff methods have homogenised water and electricity tariffs to a certain extent, making both of these subject to exogenous variations which are not so easily predictable, since the components are adjusted by ARERA with reference to regulatory periods of four years and with possible revisions every two years.
With respect to the water tariff, certain parameters relating, inter alia, to inflation rates, external variables and operating costs were amended in 2017 to determine the 2018-2019 tariffs. See "Regulatory – Resolution 918/2017/R/IDR - Biennial update of the tariff arrangements of the integrated water service".
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During 2019, ARERA continued to issue several significant regulations aimed at perfecting the regulatory framework. In particular, the definition of the tariff methodology for the third regulatory period 2020-2023 (MTI-3), following an extensive consultation process involving all the stakeholders, was completed with a significant additions to the regulation of quality levels in the regulated services.
Meanwhile, with resolutions 566-567-568 / 2019 / R / eel of 23 and 27 December, were been approved, respectively, the integrated text of the output-based regulation of electricity distribution and measurement services and the updating of the transmission service's output regulation and the update of the tariff regulation of all three services for the half-period 2020- 2023. The texts enter into force on January 1, 2020.
Certain parameters for the determination of the electricity and gas tariffs and relating to the weighted average cost of capital ("WACC") has been revised in 2018 (Resolution 639/2018/R/com) for the update of the 2019-2021 tariff. The WACC period for electricity and gas tariffs lasts six years and, pursuant to Resolution 583/2015/R/com, certain parameters have to be reviewed before the beginning of the second part of the period (including the Risk Free Rate and the Country Risk Premium) in order to align them with the current market conditions. See "Regulatory – Resolution 583/2015/R/com – Rate of return on net invested capital for infrastructure services in the electricity and gas sectors: criteria for calculating and updating".
The newly created tariff regulation of the integrated waste sector, in its first phase of application, makes reference to the method for the determination of the remuneration of the capital applicable for the electricity and gas sector. Should any such changes and uncertainties result in decreases in tariffs, this could have an impact on the business of ACEA, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Group is exposed to the risk of increases and variations in the cost of fuel, electrical energy, natural gas or other raw materials, or disruption in their supply; it is also exposed to the risk of decreases in the prices obtained for its electricity and to risks connected with its hedging strategies
In the ordinary course of business, the Group is exposed to the risk of increases and variations in the cost of fuel, electrical energy, natural gas or other raw materials, or disruption in their supply, which could significantly affect the Group’s result. It is also exposed to the risk of decreases in the price obtained for its electricity.
A wholly-owned subsidiary of the Issuer carries out the risk management activities of the Group with respect to the commodities market. The analysis and management of risks is carried out by a risk management unit according to a two-level control process that involves the execution of activities throughout the year with different frequency by type of limit (annual, monthly and daily). The risk management activities of the Group in the commodities market are carried out, inter alia, by means of forward contracts.
In addition, the Group monitors and analyses key drivers and develops sensitivity analysis on the margins of the Group as a result of the impact of changes in the cost of raw materials and fuel.
Nevertheless, the Group has not eliminated its exposure to these risks, and significant variations in fuel, raw material or electricity prices or any interruption in supplies could have a material
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adverse impact on the business prospects, results of operations and financial condition of the Issuer and the Group, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The hedging strategies pursued by the Group may create new risks and exposures and the Issuer cannot offer any assurance that they will function as intended. In addition, hedging contracts for the price of electricity and/or fuel are available in the market only for limited durations. Any hedging effect will not protect the Issuer and/or the Group against prolonged price movements.
Risks relating to the outsourcing of works, services and supplies
In addition, the Group is required to outsource a significant part of the works, services and supplies to third parties, as required pursuant to Article 177 of the Public Contracts Code. In particular, Article 177 of the Code states the obligation of any private concessionaires to award to third parties, through public tender procedure, a percentage equal to 80 per cent. of the works, services and supply contracts related to concessions having a value equal to or exceeding €150,000. The remaining quota of 20 per cent. may be awarded by private concessionaires to directly or indirectly controlled or affiliated companies or to operators selected through simplified competitive procedures. The Anticorruption Authority (“ANAC”) is entitled to verify annually that the concessionaires comply with the above mentioned percentages according to procedures to be defined through specific guidelines. In case of repeated imbalance found by ANAC, specific penalties may be applied by ANAC. Although Article 177 is applicable to concessions in force at the date of 19 April 2016, the relevant provisions are not applicable to concessions formerly awarded through the project financing formula or through public competitive procedures compliant with the European laws and regulations.
As a result of such provisions, the Group regularly employs third party contractors to carry out vital activities relating to its operations. This exposes the Group to several risks, such as (i) failure by contractors to perform satisfactorily their obligations to the Group, (ii) the commencement of bankruptcy proceedings with respect to contractors and reopening of public tender procedures; and (iii) claims from subcontractors and potential subsequent litigation.
The occurrence of any of these events could have an adverse impact on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Group may incur significant environmental expenses and liabilities
Risks of environmental and health and safety accidents and liabilities are inherent in many of the Group’s operations. Notwithstanding the Issuer’s belief that the operational policies and standards adopted and implemented throughout the Group to ensure the safety of its operations are of a high standard, it is always possible that incidents such as blow-outs, spill-over, contamination and similar events could occur that would result in damage to the environment, workers and/or local communities.
The Group has accrued risk provisions to cover existing environmental expenses and liabilities. Nevertheless, it is possible that in the future the Group may incur significant environmental expenses and liabilities in addition to the amounts already accrued owing to: (i) unknown contamination; (ii) the results of ongoing surveys or surveys that will be carried out in future
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on the environmental status of certain of the Group’s industrial sites as required by the applicable regulations on contaminated sites; and (iii) the possibility that disputes might be brought against the Group in relation to such matters.
Any such increase in costs could have an adverse impact on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
Natural disasters, service interruptions, systems failures, water shortages or contamination of water supplies as well as other disruptive events could adversely affect profitability
The Group controls and operates utility networks and maintains the associated assets with the objective of providing a continuous service. Moreover, the Group also owns and manages power stations, waste management assets and distribution networks and plants, which may be significantly damaged by several external factors beyond the Group’s control and, in turn, this may compromise the Group’s production capacity. In exceptional circumstances, electricity, gas or water shortages, or the failure of an asset, an element of a network or supporting plant and equipment, could result in the interruption of service provision or catastrophic damage resulting in significant loss of life and/or environmental damage and/or economic and social disruption. Water shortages may be caused by increases in demand and/or by climate change (average decrease in rainfall, average increase in temperature or other physical changes), which may exacerbate seasonal fluctuations in supply availability. In the event of a water shortage, the Group may incur in additional or increased costs in order to provide emergency reinforcement to supplies.
Water supplies may be subject to the risk of low quality spring water, interruption or contamination, including contamination from the presence of naturally occurring compounds and pollution from man-made sources or third parties’ actions. The Group could be held liable for human exposure to hazardous substances in its water supplies or other environmental damage. The Group could be fined for breaches of statutory obligations, including the obligation to supply drinking water that is wholesome at the point of supply, or held liable to third parties, or be required to provide an alternative water supply of equivalent quality, which could increase costs.
Moreover, significant damage or other obstruction to the waterworks facilities, including multipurpose dams and water supply systems, managed by the Issuer’s subsidiaries could result from (i) natural disasters, floods and prolonged droughts; (ii) human error in operating the waterworks facilities, including multi-purpose dams and water supply systems; and (iii) industrial strikes.
The Group’s distribution networks are also exposed to risks relating to: (i) the effectiveness of investments carried out for the replacement/renewal of grids, in terms of the expected effects on the improvement of service continuity indicators; (ii) the quality, reliability and duration of works; and (iii) the Group’s ability to meet the conditions for obtaining required authorisations, with regards to the construction and start-up of plants and the performance of work, according to the need to develop and enhance the plants. The Group’s waste-to-energy plants, and, to a lesser extent, waste treatment plants are highly complex from a technical point of view, and require the Group companies to employ qualified personnel and adopt organisational structures with a high level of know-how, and therefore may give rise to risks related to the performance continuity of the plants. Furthermore, the plants and related activities are designed to handle
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certain types of waste. If the incoming material is inadequate and does not meet the necessary specifications, this could lead to operational problems which may compromise the operational continuity of the plants and give rise to risks of a legal nature.
The Group maintains insurance against some, but not all, of these events but no assurance can be given that its insurance will be adequate to cover any direct or indirect losses or liabilities it may suffer.
An additional risk arises from adverse publicity that these events may generate and the consequent damage to the Issuer’s and the Group’s reputation.
However, notwithstanding the foregoing, there can be no guarantee that maintenance and spare part costs will not rise, that insurance products will continue to be available on reasonable terms or that any one event or series of events affecting any one or more plants or networks will not have an adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Group faces risks relating to climate changes
Electricity and natural gas consumption levels change significantly as a result of climate change. Changes in the weather can produce significant differences in the clients’ demand for energy and gas. Furthermore, adverse weather conditions can affect the regular delivery of energy due to network damage and any resulting service disruption. For instance, low rainfall and high temperatures may lead to depletion of water sources which, combined with higher water consumption, may cause a water deficit in some periods. In addition, prolonged drought periods can affect the regular production of water resources and may result in an increase in energy consumption. Significant changes of such nature could adversely affect the business prospects, results of operations and financial condition of the Issuer and/or the Group, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Group has exposure to credit risk arising from its commercial activity
Credit risk represents the Group’s exposure to potential losses that could be incurred if commercial counterparts fail to meet their debt obligations.
In order to control such risk, a central Group credit policy defines guidelines to be applied by the subsidiaries concerning the assessment of customers’ and other financial counterparties’ credit standing, the monitoring of expected collection flows, the issue of suitable reminders, the granting of extended credit terms if necessary, the taking of prime bank or insurance guarantees and the implementation of suitable recovery measures. The credit risk assessment is tailored on the type of client (i.e., public or private) and on the performance score, which is calculated on the basis of the customer’s credit behaviour. Standard default interest is charged on late payments. Nonetheless, external events can materially and adversely impact the credit risk assessment carried out by the Group in accordance with its policies; in this respect, the COVID-19 outbreak and the related containment measures adopted by the Italian government have resulted in a deterioration of the Group’s net working capital by Euro 58 million as compared to 31 December 2019 through an increase in receipts due to late payment by the Group’s customers.
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Notwithstanding the foregoing, a single default by a major counterparty, and/or an increase in current default rates by counterparties generally, could have an adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Issuer’s ability to achieve its strategic objectives could be impaired if it is unable to maintain or obtain the required licences, permits, approvals and consents
In order to carry out and expand its business, the Issuer needs to maintain or obtain a variety of licences, permits, approvals and consents from regulatory, legal, administrative, tax and other authorities and agencies. The processes for obtaining these licences, permits, approvals and consents are often lengthy, complex, unpredictable and costly.
If the Issuer is unable to maintain or obtain the relevant permits and approvals, its ability to achieve its strategic objectives could be impaired, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
Risks related to the Business Plan
On 2 April 2019, the board of directors of the Issuer approved a 2019-2022 business plan (the “Business Plan”), containing the strategic guidelines and economic and financial targets of the Group for the relevant period.
The Business Plan contains the Group’s target through to 2022 prepared on the basis of macroeconomic projections as of its approval date and strategic actions that need to be implemented. The Business Plan is based on numerous assumptions and hypotheses, some of which relate to events not fully under the control of the board of directors and management of the Issuer. In particular, the Business Plan contains a set of assumptions, estimates and predictions that are based on the occurrence of future events and actions to be taken by, inter alia, the board of directors of the Issuer, in the period from 2019 to 2022, which include, among other things, hypothetical assumptions of different natures subject to risks and uncertainties arising from the current economic environment, relating to future events and actions of directors and the management of the Issuer that may not necessarily occur, events, actions, and other assumptions including those related to the performance of the main economic and financial variables or other factors that affect their development over which the directors and management of the Issuer do not have, or have limited, control.
Therefore, the Group is exposed to the risk that it may be unable to implement part or all of its growth strategy or within the timeframe expected, that the assumptions on which the Group based its forecasts and growth strategy may be incorrect or that the growth strategy may not achieve the results expected. Factors that may cause actual results to differ materially from those in the Business Plan include (but are not limited to) the possibility of divestitures or disposals, the transfer of certain assets and networks upon termination, revocation or non- renewal of concessions and the reduction of fixed costs including through cost synergies from the Group’s acquisitions.
Any such failure to develop, revise or implement the growth strategy in a timely and effective manner could have an adverse impact on the Group’s business, financial position and results of operations and consequently on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or repay the Notes in full at their maturity.
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There can be no assurances of the success of any of the Group’s future attempts to acquire additional businesses or of the Group’s ability to integrate any businesses acquired in the future
The Issuer’s business strategy involves investments in its core businesses and may also involve the acquisition of additional businesses. The success of this strategy depends in part on the Issuer’s ability to successfully identify and acquire, on acceptable terms, suitable companies and other assets and, once acquired, on the successful integration of these into the Group’s operations, as well as its ability to identify suitable strategic partners and conclude suitable terms with them. Recently, the Issuer has undertaken several acquisitions; for more information, see “Description of the Issuer – Recent Developments”.
An inability to implement such strategy or a failure in any particular implementation of the same, as well as the need for significant further investments in order to achieve such implementation, could have an adverse impact on the Group’s business, financial position and results of operations and consequently on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or repay the Notes in full at their maturity.
The Group faces increasing competition in the energy and gas markets
The energy and gas markets in which the Issuer and the Group operate are subject to increasing competition in Italy. In particular, in the electricity and gas businesses, the Group competes with other producers and traders from both Italy and outside of Italy who sell electricity and gas in the Italian market for industrial, commercial and residential usage.
An increase in competition could have an impact on the prices paid or achieved in the Issuer’s electricity production and trading activities, which in turn could have an adverse impact on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
Legal and internal control risks
The evolution in the legislative and regulatory context for the electricity, waste and water sectors poses a risk to the Group
The Group operates mainly in regulated markets and changes in applicable legislation and regulation, whether at a national or European level, as well as in the regulations adopted by specific regulatory agencies, including the Italian Regulatory Authority for Energy, Networks and Environment (Autorità di Regolazione per Energia Reti Ambiente – "ARERA" or the "Authority" – formerly Autorità per l’Energia Elettrica, il Gas e il Sistema Idrico – "AEEGSI"), and the manner in which they are interpreted, could impact the Group’s earnings and operations positively or negatively, both through the effect on current operations and also through the impact on the cost and revenue-earning capabilities of current and future planned developments in the business. Such changes could include changes in tax rates, changes in environmental or safety or other workplace laws, or changes in the regulation of cross border transactions. Public policies related to water, waste, energy, energy efficiency and/or air emissions, may impact the overall markets in which the Group operates.
The Group operates its business in a political, legal, and social environment which is expected to continue to have a material impact on the performance of the Group. The regulations of a
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particular sector may affect many aspects of the Issuer’s and the Group’s business and, in many respects, determines the manner in which the Group conducts its business and the fees it charges or obtains for its products and services.
Furthermore, the Group is subject to the application of legislation regulating local public services of economic importance which has been affected by frequent amendments in the past 10 years in Italy.
In light of the above, the laws and regulations in force as at the date of this Base Prospectus (namely, Article 34, paragraphs 20-26 of Law Decree No. 179 of 18 October 2012) provide that companies managing certain public services in the concession regime (such as the Issuer and its subsidiaries) will maintain the relevant concessions until (i) the scheduled maturity date set forth in the relevant concession agreement or (ii) 31 December 2020, if the relevant concession agreement does not set forth the concession’s expiry date.
The expiry of any concessions currently held by the Group may adversely affect the Group’s business, results of operations and financial condition, with a consequent adverse impact on the market value of the Notes and the Issuer’s ability to repay the Notes in full at their maturity.
The nature of its business exposes the Group to the risk of non-compliance with the consumer protection rules set forth under Legislative Decree No. 206 of 6 April 2005, including, inter alia, the prohibition of unfair commercial practices and misleading advertising.
Moreover, the Group is subject to the rules governing territorial planning and management of the integrated water service, including those relating to the reorganization of the regulation of local public services with economic relevance (the "MADIA reform", implemented, inter alia, through Legislative Decree No. 175/2016, as amended by Law Decree No. 100 of 16 June 2017, which sets forth provisions on publicly owned companies) and those relating to environmental matters (e.g., the provisions of Law No. 221 of 28 December 2015 on the so- called collegato ambientale), whose violation may trigger the application of administrative and/or criminal penalties.
For further details and information on the legislative changes in these matters, see "Regulatory" below.
In addition, the Group is exposed, inter alia, to the risks concerning personal data processing, especially following the introduction of Regulation (EU) 2016/679 ("GDPR"). Therefore the Group has adopted a risk-based Privacy Governance Model that defines roles and responsibilities within the organization involved in the processing of personal data, as well as specific internal policies and procedures designed to ensure compliance with the data protection law (e.g. management data subjects requests, data breach policy, data retention policy, etc.). Moreover a Group Data Protection Officer has been appointed by the controllers, which is supported by a DPO Office in his advisory and monitoring of compliance tasks..
Any new or substantially altered rules and standards may adversely affect the Group’s revenues, profits and general financial condition and therefore have a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
Risks related to legal and tax proceedings and the potential violation of laws and regulations.
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The Issuer and the Group are party to a number of legal and tax proceedings arising in the ordinary course of business. The Issuer has made provision in its consolidated financial statements for contingent liabilities related to particular proceedings in accordance with the advice of internal and external legal counsel. Notwithstanding the foregoing, the Group has not recorded provisions in respect of all of the proceedings to which it is subject. In particular, it has not recorded provisions in cases in which it is not possible to quantify any negative outcome and in cases in which it currently believes that negative outcomes are not likely. There can be no assurance, therefore, that the Group will not incur significant losses in connection with pending legal and tax proceedings due to: (i) uncertainty regarding the final outcome of such proceedings; (ii) the occurrence of new developments that were not known to management when evaluating the likely outcome of proceedings; (iii) the emergence of new evidence and information; and (iv) underestimation of probable future losses.
Adverse outcomes in existing or future litigation could have adverse impacts on the financial position and results of operations of the Group and consequently an adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity. For further information on the principal legal proceedings that the Group is currently involved in, see "Description of the Issuer — Litigation".
Moreover, the Group has adopted systems for organization, management and control pursuant to Italian Legislative Decree 231/2001 (“231 Model”), as a defense against the administrative responsibility that could be attributed to the Group pursuant to Italian Legislative Decree No. 231 of 8 June 2001 (“Legislative Decree 231/2001”). Legislative Decree 231/2001 introduced a specific system of enterprise liability for several types of criminal offenses committed in the corporate interest and/or to its advantage by persons in senior management positions or those persons’ subordinates. The adoption of a 231 Model does not in itself exclude any form of liability under Legislative Decree 231/2001, and any failure to update this model increases the risk that administrative liability under Legislative Decree 231/2001 may arise. Any proceedings relating to alleged offences covered by Legislative Decree 231/2001, regardless of their outcome, could be costly and divert management’s attention from other aspects of the business, cause adverse publicity and reputational damage and could have an adverse effect on our business, financial condition and results of operations. Furthermore, if an offense falling within the scope of Legislative Decree 231/2001 is committed, the Group may be subject to administrative or criminal penalties (e.g. fines, confiscations of profits), including the loss or revocation of authorizations, permits and licenses, exclusion from subsidies and loan contributions, the imposition of restrictions on the activities of the Group or damage to its reputation. The occurrence of any of these events could have an adverse impact on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity. Risk management policies, procedures and methods may leave the Group exposed to unidentified or unanticipated risks
The Group has invested significant resources to developing policies, procedures and assessment methods to manage market, credit, liquidity and operating risk and intends to continue to do so in the future. Nonetheless, the Group’s risk management techniques and strategies may not be fully effective in mitigating its risk exposure in all market environments or against all types of risks, including risks that Group fails to identify or anticipate. In addition,
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while the Group maintains insurance coverages to protect itself from several risks in accordance with its risk management framework, no assurance can be given that its insurance will be adequate to cover any direct or indirect losses or liabilities it may suffer.
Furthermore, the Group is exposed to the risk that functional problems in its technological and IT architecture could cause an interruption in its business, as well as the risk of unauthorized access to IT systems or the possible success of external cyber-attacks, which may result in damage, loss, removal or unlawful disclosure of the data managed by the Group which could expose the Group to financial penalties and fines and, in turn, may harm its image or reputation vis-à-vis its customers. Additionally, the Group uses multiple IT platforms, systems and applications to manage certain of its operations (e.g. industrial control systems and operational technology) in the distributions activities. Any breakdowns and interruptions to such IT platforms, systems and applications (which may be caused also by external cyber-attacks) could disrupt the Group’s business and ultimately result in equipment damage, power outages, and a range of other hardware, software and network problems. Although the Group regularly maintains and updates its IT systems, and within its IT security framework it has adopted advanced solutions for information security, any problems associated with inefficient maintenance, a failure or delay in updating its IT systems, any unauthorized access to its computer systems or a successful external cyber-attack could have an adverse impact on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
The Group’s operations are subject to extensive environmental laws, rules and regulations which regulate, among other things, air emissions, water discharges and the management of hazardous and solid waste
Compliance with environmental laws, rules and regulations requires the Group to incur significant costs relating to environmental monitoring, installation of pollution control equipment, emission fees, maintenance and upgrading of facilities, remediation and permitting. The cost of compliance with existing and future environmental law requirements may increase in the future. Any increase in such costs, unless promptly recovered, could have an adverse impact on the Group’s business and results of operations, financial position and cash flows, with a consequent adverse impact on the market value of the Notes and/or on the Issuer’s ability to pay interest on the Notes or to repay the Notes in full at their maturity.
FACTORS WHICH ARE MATERIAL FOR THE PURPOSE OF ASSESSING THE MARKET RISKS ASSOCIATED WITH NOTES ISSUED UNDER THE PROGRAMME
Risks related to the structure of a particular issue of Notes
A wide range of Notes may be issued under the Programme. A number of these Notes may have features which contain particular risks for potential investors. Set out below is a description of the most common of such features, distinguishing between factors which may occur in relation to any Notes:
Notes subject to optional redemption by the Issuer
An optional redemption feature of Notes is likely to limit their market value. During any period when the Issuer may elect to redeem Notes, the market value of those Notes generally will not
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rise substantially above the price at which they can be redeemed. This also may be true prior to any redemption period.
The Issuer may be expected to redeem Notes when its cost of borrowing is lower than the interest rate on the Notes. At those times, an investor generally would not be able to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the Notes being redeemed and may only be able to do so at a significantly lower rate. Potential investors should consider reinvestment risk in light of other investments available at that time.
In addition, with respect to the Clean-up Call Option (Condition 9(e) (Redemption and Purchase – Clean-Up Call Option)), there is no obligation on the Issuer to inform investors if and when 80 per cent. or more of original aggregate principal amount of the relevant Series of Notes has been redeemed or is about to be redeemed, and the Issuer’s right to redeem will exist notwithstanding that immediately prior to the serving of a notice in respect of the exercise of the Clean-up Call Option the Notes may have been trading significantly above par, thus potentially resulting in a loss of capital invested.
Redemption for tax reasons
In the event that the Issuer would be obliged to increase the amounts payable in respect of any Notes due to any withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Republic of Italy or any political subdivision thereof or any authority therein or thereof having power to tax, the Issuer may redeem all outstanding Notes in accordance with the Conditions. In such circumstances an investor may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the relevant Notes.
If the Issuer has the right to convert the interest rate on any Notes from a fixed rate to a floating rate, or vice versa, this may affect the secondary market and the market value of the Notes concerned
Fixed/Floating Rate Notes are Notes which may bear interest at a rate that converts from a fixed rate to a floating rate, or from a floating rate to a fixed rate. Where the Issuer has the right to effect such a conversion, this will affect the secondary market and the market value of the Notes since the Issuer may be expected to convert the rate when it is likely to produce a lower overall cost of borrowing. If the Issuer converts from a fixed rate to a floating rate in such circumstances, the spread on the Fixed/Floating Rate Notes may be less favourable than then prevailing spreads on comparable Floating Rate Notes tied to the same reference rate. In addition, the new floating rate at any time may be lower than the rates on other Notes. If the Issuer converts from a floating rate to a fixed rate in such circumstances, the fixed rate may be lower than then prevailing market rates.
The value of fixed rate Notes may change
Investment in Notes which bear interest at a fixed rate involves the risk that subsequent changes in market interest rates may adversely affect the market value of the relevant Tranche of Notes. Investors will not be able to calculate in advance their rate of return on floating rate notes
A key difference between floating rate notes and fixed rate notes is that interest income on floating rate notes cannot be anticipated. Due to varying interest income, investors are not able
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to determine a definite yield of floating rate notes at the time they purchase them, so that their return on investment cannot be compared with that of investments having longer fixed interest periods. If the terms and conditions of the notes provide for frequent interest payment dates, investors are exposed to reinvestment risk if market interest rates decline. That is, investors may reinvest the interest income paid to them only at the relevant lower interest rates then prevailing. In addition, the Issuer’s ability to also issue fixed rate notes may affect the market value and the secondary market (if any) of the floating rate notes (and vice versa). Investment in Notes which bear interest at a floating rate comprise (i) a reference rate and (ii) a margin to be added or subtracted, as the case may be, from such base rate. Typically, the relevant margin will not change throughout the life of the Notes but there will be a periodic adjustment (as specified in the relevant final terms) of the reference rate (e.g., every three months or six months) which itself will change in accordance with general market conditions. Accordingly, the market value of floating rate Notes may be volatile if changes, particularly short term changes, to market interest rates evidenced by the relevant reference rate can only be reflected in the interest rate of these Notes upon the next periodic adjustment of the relevant reference rate. The regulation and reform of "benchmarks" may adversely affect the value of Notes linked to such "benchmarks"
The London Interbank Offered Rate ("LIBOR"), the Euro Interbank Offered Rate ("EURIBOR") and other interest rate or other types of rates and indices which are deemed to be benchmarks are the subject of ongoing national and international regulatory discussions and proposals for reform. Some of these reforms are already effective whilst others are still to be implemented. Regulation (EU) No. 2016/1011 (the "Benchmark Regulation") on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds became applicable from 1 January 2018. The Benchmark Regulation applies to the provision of benchmarks, the contribution of input data to a benchmark and the use of a benchmark, within the EU. The Benchmarks Regulation could have a material impact on any Notes linked to LIBOR, EURIBOR or another benchmark rate or index, in particular, if the methodology or other terms of the benchmark are changed in order to comply with the terms of the Benchmark Regulation, and such changes could (amongst other things) have the effect of reducing or increasing the rate or level, or affecting the volatility of the published rate or level, of the benchmark. More broadly, any of the international, national or other proposals for reform, or the general increased regulatory scrutiny of benchmarks, could increase the costs and risks of administering or otherwise participating in the setting of a benchmark and complying with any such regulations or requirements. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to certain "benchmarks," trigger changes in the rules or methodologies used in certain "benchmarks" or lead to the discontinuance or unavailability of quotes of certain "benchmarks". As an example of such benchmark reforms, on 27 July 2017, the UK Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021 and, on 12 July 2018, announced that the LIBOR benchmark may cease to be a regulated benchmark under the Benchmark Regulation. Such announcements indicate that the continuation of LIBOR on the current basis (or at all) cannot and will not be guaranteed after 2021. In addition, on 29 November 2017, the Bank of England and the FCA announced that, from January 2018, its working group on Sterling risk free rates has been mandated with implementing a broad-based transition to the Sterling
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Overnight Index Average ("SONIA") over the next four years across sterling bond, loan and derivative markets so that SONIA is established as the primary sterling interest rate benchmark by the end of 2021. On 21 September 2017, the European Central Bank announced that it would be part of a new working group tasked with the identification and adoption of a "risk free overnight rate" which can serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area. On 13 September 2018, the working group on Euro risk-free rates recommended the new Euro short-term rate ("€STR") as the new risk-free rate for the euro area. The €STR was published for the first time on 2 October 2019. Although EURIBOR has been reformed in order to comply with the terms of the Benchmark Regulation, it remains uncertain as to how long it will continue in its current form, or whether it will be further reformed or replaced with €STR or an alternative benchmark. The elimination of LIBOR or any other benchmark, or changes in the manner of administration of any benchmark, could require or result in an adjustment to the interest calculation provisions of the Conditions (as further described in Condition 7(i) (Benchmark Replacement)), or result in adverse consequences to holders of any Notes linked to such benchmark (including Floating Rate Notes whose interest rates are linked to LIBOR, EURIBOR or any other such benchmark that is subject to reform). Furthermore, even prior to the implementation of any changes, uncertainty as to the nature of alternative reference rates and as to potential changes to such benchmark may adversely affect such benchmark during the term of the relevant Notes, the return on the relevant Notes and the trading market for securities (including the Notes) based on the same benchmark. Investors should consult their own independent advisers and make their own assessment about the potential risks imposed by the BMR reforms in making any investment decision with respect to any Notes referencing a "benchmark". The Conditions provide also for certain additional arrangements in the event that a published Original Reference Rate (including any page on which such Original Reference Rate may be published (or any successor service)) becomes unavailable, including the possibility that the rate of interest could be set by reference to a Successor Reference Rate or an Alternative Reference Rate, and that such Successor Reference Rate or Alternative Reference Rate may be adjusted (if required) by the application of an Adjustment Spread. Indeed, if the Issuer is unable to appoint an Independent Adviser, or the Independent Adviser appointed by it fails to determine a Successor Reference Rate or an Alternative Reference Rate, the Issuer may determine such Alternative Reference Rate and Adjustment Spread. The application of a Successor Reference Rate or an Alternative Reference Rate or an Adjustment Spread may result in the relevant Notes performing differently (which may include payment of a lower interest rate) than they would do if the relevant Original Reference Rate were to continue to apply in its current form. If no Adjustment Spread is determined, a Successor Reference Rate or Alternative Reference Rate may nonetheless be used to determine the rate of interest. In certain circumstances, the ultimate fallback of interest for a particular Interest Period may result in the rate of interest for the last preceding Interest Period being used. This may result in the effective application of a fixed rate for Floating Rate Notes based on the rate which was last used for the relevant Notes or last observed on the Relevant Screen Page. In addition, due to the uncertainty concerning the availability of Successor Reference Rates and Alternative Reference Rates and the involvement of an Independent Adviser, the relevant fallback provisions may not operate as intended at the relevant time. If the Independent Adviser or, as applicable, the Issuer determines that amendments to the Conditions or the Agency
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Agreement are necessary to ensure the proper operation of any Successor Reference Rate or Alternative Reference Rate and/or Adjustment Spread or to comply with any applicable regulation or guidelines on the use of benchmarks or other related document issued by the competent regulatory authority, then such amendments shall be made without any requirement for the consent or approval of Noteholders, as provided by Condition 7(i). Any such consequences could have a material adverse effect on the value of and return on any such Notes. Investors should consult their own independent advisers and make their own assessment about the potential risks imposed by the Benchmark Regulation reforms or possible cessation or reform of certain reference rates in making any investment decision with respect to any Notes linked to or referencing a benchmark. Notes issued at a substantial discount or premium
The market values of securities issued at a substantial discount (such as Zero Coupon Notes) or premium to their principal amount tend to fluctuate more in relation to general changes in interest rates than do prices for more conventional interest-bearing securities. Generally, the longer the remaining term of such securities, the greater the price volatility as compared to more conventional interest-bearing securities with comparable maturities.
There can be no assurance that Notes issued as "Green Bonds" and the related use of proceeds will be suitable for the investment criteria of an investor seeking securities to be used for a particular purpose If so specified in the relevant Final Terms, the Issuer may issue Notes described as "Green Bonds" for the purposes of financing and/or refinancing, in whole or in part, Eligible Green Projects (such term as defined in the "Use of Proceeds" section). In such circumstances, prospective investors should have regard to the information set out, or referred to, under the paragraph "Reasons for the offer – Use of proceeds" of the relevant Final Terms and must determine for themselves the relevance of such information, together with any other investigation such investors deem necessary, for the purpose of any investment in such Notes and its suitability also in light of their own circumstances. In particular, no assurance can be given that the use of such net proceeds for any Eligible Green Projects will satisfy, whether in whole or in part, any present or future investor expectations or requirements as regards any investment criteria or guidelines with which such investor or its investments are required to comply, whether under any present or future applicable law or regulations or under its own by- laws or other governing rules or investment portfolio mandates. As at the date of this Base Prospectus, no Green Bond framework agreement is in place. Should a Green Bond framework agreement be entered into during the duration of the Programme, the framework agreement will be disclosed in the relevant Final Terms. In connection with the issue of "Green Bonds", the Issuer may request a specialised consulting firm or rating agency to issue a so-called second-party opinion confirming that the relevant "green" project expected to be financed and/or refinanced by the net proceeds of the "Green Bonds" has been defined in accordance with the broad categorisation of eligibility for green projects set out in the "Green Bond Principles" ("GBP") published by the International Capital Market Association ("ICMA") and/or a second-party opinion regarding the suitability of the Notes as an investment in connection with certain environmental and sustainability projects (any such second-party opinion, a "Second-party Opinion"). A Second-party Opinion may not reflect the potential impact of all risks related to the structure, market, additional risk factors
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and other factors that may affect the value of the Notes or the projects financed or refinanced by the relevant net proceeds. A Second-party Opinion would not constitute a recommendation to buy, sell or hold the relevant "Green Bonds" and would only be current as of the date it is released. A withdrawal of the Second-party Opinion may affect the value of such "Green Bonds" and/or may have consequences for certain investors with portfolio mandates to invest in green or social assets. Furthermore, prospective investors must determine for themselves the relevance of any such opinion or certification and/or the information contained therein and/or the provider of such opinion or certification for the purpose of any investment in the Notes. Currently, the providers of such opinions and certifications are not subject to any specific regulatory or other regime or oversight. For the avoidance of doubt, any such opinion or certification is not, nor shall it be deemed to be, incorporated into and/or form part of the Base Prospectus. While it is the intention of the Issuer to apply the net proceeds of Notes issued as "Green Bonds" so specified for Eligible Green Projects in, or substantially in, the manner described, or referred to, under the "Use of Proceeds" section and the paragraph "Reasons for the offer – Use of proceeds" of the relevant Final Terms, there can be no assurance that the relevant project(s) or use(s) the subject of, or related to, any Eligible Green Projects will be capable of being implemented in or substantially in such a manner and/or accordance with any timing schedule and that accordingly such proceeds will be totally or partially disbursed for such Eligible Green Projects. In the event that any such Notes are listed or admitted to trading on any dedicated "green", "environmental", "sustainable" or other equivalently-labelled segment of any stock exchange or securities market (whether or not regulated), no representation or assurance is given by the Issuer or any Dealer that such listing or admission satisfies, whether in whole or in part, any present or future investor expectations or requirements as regards any investment criteria or guidelines with which such investor or its investments are required to comply. Furthermore, it should be noted that the criteria for any such listings or admission to trading may vary from one stock exchange or securities market to another. Nor is any representation or assurance given or made by the Issuer or any other person that any such listing or admission to trading will be obtained in respect of any such Notes or, if obtained, that any such listing or admission to trading will be maintained during the life of the Notes. Any such event or failure to apply the proceeds of any issue of Notes for Eligible Green Projects as aforesaid and/or withdrawal of any such opinion or certification or any such opinion or certification attesting that the Issuer is not complying in whole or in part with any matters for which such opinion or certification is opining or certifying on and/or any such Notes no longer being listed or admitted to trading on any stock exchange or securities market as aforesaid will not constitute an Event of Default under the Notes but may have a material adverse effect on the value of such Notes and/or result in adverse consequences for, amongst others, investors with portfolio mandates to invest in securities to be used for a particular purpose. Risks related to the Notes generally
Set out below is a brief description of certain risks relating to the Notes generally:
The Notes may not be a suitable investment for all investors
Each potential investor in the Notes must determine the suitability of that investment in the light of its own circumstances. In particular, each potential investor should:
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(f) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained or incorporated by reference in this Base Prospectus or any applicable supplement;
(g) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;
(h) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor’s currency;
(i) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant indices and financial markets; and
(j) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
Some Notes are complex financial instruments. Sophisticated institutional investors generally do not purchase complex financial instruments as stand-alone investments. They purchase complex financial instruments as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in Notes which are complex financial instruments unless it has the expertise (either alone or with a financial adviser) to evaluate how the Notes will perform under changing conditions, the resulting effects on the value of the Notes and the impact this investment will have on the potential investor’s overall investment portfolio.
Change of Control
Upon the occurrence of certain change of control events relating to the Issuer, as set out in Condition 9(g) (Redemption and Purchase - Redemption at the option of Noteholders upon a Change of Control Put Event), under certain circumstances each Noteholder will have the right to require the Issuer to redeem its Notes at its principal amount or such other amount as may be specified in the relevant Final Terms ("Change of Control Redemption Amount"). It is possible, however, that the Issuer will not have sufficient funds to redeem the Notes at the time that a Change of Control Put Event in respect of the Issuer occurs. If sufficient funds are not available to the Issuer for the purposes of carrying out the redemption, Noteholders may receive less than the principal amount of the Notes should they elect to exercise their right to redeem. Furthermore, if such a right to redeem is exercised by the Noteholders, this might adversely affect the Issuer’s financial position.
The Notes do not restrict the amount of debt which the Issuer may incur
The terms and conditions relating to the Notes do not contain any restriction on the amount of indebtedness which the Issuer and its Subsidiaries may from time to time incur. In the event of any insolvency or winding-up of the Issuer, the Notes will rank equally with the Issuer’s other unsecured senior indebtedness and, accordingly, any increase in the amount of the Issuer’s unsecured senior indebtedness in the future may reduce the amount recoverable by Noteholders. In addition, the Notes are unsecured and, save as provided in Condition 5 (Negative Pledge), do not contain any restriction on the giving of security by the Issuer and its
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Subsidiaries over present and future indebtedness. Where security has been granted over assets of the Issuer to secure indebtedness, in the event of any insolvency or winding-up of the Issuer, such indebtedness will, in respect of such assets, rank in priority over the Notes and other unsecured indebtedness of the Issuer.
Modification and waiver
The conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.
Risk connected with the possibility of changes to the tax regime of the Notes
It is not possible to predict whether the tax regime applicable on the interest and on other income, including capital gains, deriving from the Notes, will undergo changes during the life of such Notes; therefore, it cannot be ruled out that, in the event of such changes, the net values indicated may alter, perhaps significantly, from those that actually apply to the Notes at the various payment dates.
Noteholders will be responsible for paying all present and future taxes that, in accordance with the provisions applicable from time to time will apply to the Notes, or to which the Notes become subject for whatever reason.
Any greater fiscal charges on profits or on capital gains in connection with the Notes, with reference to those payable under the applicable fiscal regulations, following legislative or regulatory changes, or as a result of a change of practice in terms of interpretation of the rules by the financial administration, will consequently mean a reduction in the return on the Notes, net of the tax charge, and this will not result in any obligation of the Issuer to pay the Noteholders any additional sum by way of compensation for such greater tax burden.
Payments in respect of the Notes may in certain circumstances be made subject to withholding or deduction of tax
All payments in respect of Notes will be made free and clear of withholding or deduction of Italian taxation, unless the withholding or deduction is required by law. In that event, the Issuer will pay such additional amounts as will result in the Noteholders receiving such amounts as they would have received in respect of the Notes had no such withholding or deduction been required. The Issuer’s obligation to gross up is, however, subject to a number of exceptions, including withholding or deduction:
(a) pursuant to Italian Legislative Decree No. 239 of 1 April 1996 as amended, supplemented or restated from time to time;
(b) pursuant to the U.S. Foreign Account Tax Compliance Act;
(c) pursuant to Presidential Decree No. 600 of 29 September 1973 as amended, supplemented or restated from time to time; and
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(d) pursuant to Italian Law Decree No. 512 of 30 September 1983, converted into Law No. 649 of 25 November 1983, as amended from time to time a brief description of which is set out below.
Prospective purchasers of Notes should consult their tax advisers as to the overall tax consequences of acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes, including in particular the effect of any state, regional or local tax laws of any country or territory. See also "Taxation".
Italian substitutive tax
Italian substitutive tax is applied to payments of interest and other proceeds (including the difference between the redemption amount and the issue price) at a rate of 26 per cent. to (i) certain Italian resident Noteholders and (ii) non-Italian resident Noteholders who have not filed in due time with the relevant depository a declaration (autocertificazione) stating, inter alia, that he or she is resident for tax purposes in a country which allows for an adequate exchange of information with the Italian tax authorities (See also "Taxation").
Change of law
The conditions of the Notes are governed by English law in effect as at the date of this Base Prospectus, except for the provisions of Condition 16 (Meetings of Noteholders; Noteholders’ Representative; Modification and Waiver) which are subject to compliance with mandatory laws, legislation, rules and regulations of Italy in force from time to time and, where applicable Italian law so requires, the Issuer’s by laws. No assurance can be given as to the impact of any possible judicial decision or change to applicable English law or administrative practice after the date of this Base Prospectus and any such change could materially adversely impact the value of any Notes affected by it.
Investors who purchase Notes in denominations that are not an integral multiple of the Specified Denomination may be adversely affected if definitive Notes are subsequently required to be issued
In relation to any issue of Notes which have denominations consisting of a minimum Specified Denomination plus one or more higher integral multiples of another smaller amount, it is possible that such Notes may be traded in amounts that are not integral multiples of such minimum Specified Denomination. In such a case a holder who, as a result of trading such amounts, holds an amount which is less than the minimum Specified Denomination in his account with the relevant clearing system at the relevant time may not receive a definitive Note in respect of such holding (should definitive Notes be printed) and would need to purchase a principal amount of Notes such that its holding amounts to a Specified Denomination.
If such Notes in definitive form are issued, holders should be aware that definitive Notes which have a denomination that is not an integral multiple of the minimum Specified Denomination may be illiquid and difficult to trade.
Potential conflicts of interest
Any Calculation Agent appointed under the Programme (whether the Fiscal Agent, any Paying Agent or otherwise) is the agent of the Issuer and not the agent of the Noteholders. Potential conflicts of interest may exist between the Calculation Agent (if any) and Noteholders
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(including where a Dealer acts as a Calculation Agent), including with respect to certain determinations and judgments that such Calculation Agent may make pursuant to the Conditions that may influence amounts receivable by the Noteholders during the term of the Notes and upon their redemption.
Risks related to the market generally
Set out below is a brief description of the principal market risks, including liquidity risk, exchange rate risk, interest rate risk and credit risk:
The secondary market generally
Notes may have no established trading market when issued, and one may never develop. If a market does develop, it may not be very liquid. Therefore, investors may not be able to sell their Notes easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market. This is particularly the case for Notes that are especially sensitive to interest rate, currency or market risks, are designed for specific investment objectives or strategies or have been structured to meet the investment requirements of limited categories of investors. These types of Notes generally would have a more limited secondary market and more price volatility than conventional debt securities. Illiquidity may have a severely adverse effect on the market value of Notes. In addition, Notes issued under the Programme might not be listed on a stock exchange or regulated market and, in these circumstances, pricing information may be more difficult to obtain and the liquidity and market prices of such Notes may be adversely affected. In addition, liquidity may be limited if the Issuer makes large allocations to a limited number of investors.
Exchange rate risks and exchange controls
The Issuer will pay principal and interest on the Notes in the Specified Currency. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the "Investor’s Currency") other than the Specified Currency. These include the risk that exchange rates may significantly change (including changes due to devaluation of the Specified Currency or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the Specified Currency would decrease (1) the Investor’s Currency-equivalent yield on the Notes, (2) the Investor’s Currency equivalent value of the principal payable on the Notes and (3) the Investor’s Currency equivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate or the ability of the Issuer to make payments in respect of the Notes. As a result, investors may receive less interest or principal than expected, or no interest or principal.
Interest rate risks
Investment in Fixed Rate Notes involves the risk that if market interest rates subsequently increase above the rate paid on the Fixed Rate Notes, this will adversely affect the value of the Fixed Rate Notes.
Credit ratings
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One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised, suspended or withdrawn by the rating agency at any time.
In general, European regulated investors are restricted from using a rating for regulatory purposes if such rating is not issued by a credit rating agency established in the European Union and registered under the CRA Regulation unless (1) the rating is provided by a credit rating agency not established in the European Union but is endorsed by a credit rating agency established in the European Union and registered under the CRA Regulation or (2) the rating is provided by a credit rating agency not established in the European Union which is certified under the CRA Regulation. The list of registered and certified rating agencies published by the ESMA on its website in accordance with the CRA Regulation is not conclusive evidence of the status of the relevant rating agency included in such list, as there may be delays between certain supervisory measures being taken against a relevant rating agency and the publication of the updated ESMA list. Certain information with respect to the credit rating agencies and ratings will be disclosed in the Final Terms.
Not all non-Italian investors in the Notes could be able to obtain the benefits of the regime under Decree No. 239
The regime provided by Decree No. 239 applies if certain procedural requirements are met. There can be no assurance that all non-Italian resident investors will be able to claim the application of the withholding tax exemption regime (see "Taxation").
Notes may be affected by a proposal relating to Financial Transactions Tax ("FTT")
On 14 February 2013 the European Commission published a new legislative proposal on the Financial Transaction Tax (the "FTT"). The proposed FTT has a very broad scope and could apply, under certain circumstances to certain dealings in the Notes (see "Taxation").
According to trade press reports, the European Commission confirmed that a ministerial meeting to find an agreement on the issue will take place by mid-2018.
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INFORMATION INCORPORATED BY REFERENCE
The following information shall be deemed to be incorporated by reference in, and to form part of, this Base Prospectus:
1. the audited consolidated annual financial statements (including the auditors’ report thereon and notes thereto) of the Issuer in respect of the year ended 31 December 2019 (the “2019 Financial Statements”), which can be found on the Issuer’s website at:
https://www.gruppo.acea.it/content/dam/acea-corporate/acea- foundation/pdf/en/company/investors/2020/reports/2019-consolidated-financial- statements.pdf;
2. the audited consolidated annual financial statements (including the auditors’ report thereon and notes thereto) of the Issuer in respect of the year ended 31 December 2018 (the “2018 Financial Statements”), which can be found on the Issuer’s website at:
https://www.gruppo.acea.it/content/dam/acea-corporate/acea- foundation/pdf/en/company/investors/2019/reports/consolidated-financial-statements- of-the-group-for-the-2018.pdf;
3. a press release dated 13 May 2020 in respect of the quarter ended 31 March 2020 containing the unaudited interim financial information as at and for the period ended 31 March 2020 (the "Q1 2020 Press Release"), which can be found on the Issuer’s website at:
https://www.gruppo.acea.it/content/dam/acea-corporate/acea- foundation/pdf/en/company/media/comunicati-ps/2020/05/AceaCPS-13052020- en.pdf;
4. the section entitled “Terms and Conditions” on pages 49 – 72 of the base prospectus relating to the Programme dated 15 July 2019 (the “2019 Base Prospectus”), which can be found on the Luxembourg Stock Exchange’s website at:
https://www.gruppo.acea.it/content/dam/acea-corporate/acea- foundation/pdf/en/company/investors/2019/emtn/base-prospectus-2019.pdf;
The parts of the 2019 Financial Statements, the 2018 Financial Statements and the 2019 Base Prospectus that are not listed in the cross reference list and therefore are not incorporated by reference are either not relevant for investors or covered in another part of the Base Prospectus; provided, however, that any statement contained in this Base Prospectus or in any information or in any of the documents incorporated by reference in, and forming part of, this Base Prospectus shall be modified or superseded for the purpose of this Base Prospectus to the extent that a statement contained in any document subsequently incorporated by reference modifies or supersedes such statement provided that such modifying or superseding statement is made by way of a supplement to this Base Prospectus pursuant to Article 23 of the Prospectus Regulation.
Copies of the documents specified above as containing information incorporated by reference in this Base Prospectus may be inspected, free of charge at the specified office of the Listing
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Agent in Luxembourg, on the website of the Luxembourg Stock Exchange (https://www.bourse.lu) and on the website of the Issuer (https://www.gruppo.acea.it/en).
In addition, this Base Prospectus will be available in electronic form on Issuer's website at: https://www.gruppo.acea.it/en/investors/financial-structure/emtn-programme.
Cross-reference list
The tables below set out the relevant page references for (i) the notes and the auditor’s report in respect of the consolidated financial statements of Acea as at and for the years ended 31 December 2019 and 31 December 2018 and (ii) the information included in the Q1 2020 Press Release.
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2019 Financial Statements Page number(s) Consolidated Income Statement 199 Comprehensive Consolidated Income Statement 200 Consolidated Statement of Financial Position 201 Consolidated Statement of Cash Flows 202 Consolidated Statement of Changes in Shareholders’ equity 203 Notes to the Consolidated Income Statement 204-214 Notes to the Consolidated Statement of Financial Position 215-232 Commitments and Contingencies 233 Update on major disputes and litigation 128-129 Transport Service Tariffs 33-38 ARERA water services activities 38-45 Electrical Regulation 45 ARERA Electric Services: Energy Infrastructures Segment 45-47 ARERA Electric Services: Commercial and Trading Segment 47-50 Power Generation Regulation 50 Environmental Regulation 50-51 Independent Auditors’ Report 278-287
2018 Financial Statements Page number(s) Consolidated Income Statement 168 Consolidated Statement of Comprehensive Income 169 Consolidated Statement of Financial Position 170 Consolidated Statement of Cash flows 171 Statement of changes in consolidated equity 172 Notes 173-201 Update on major disputes and litigation 216-223 Transport Service Tariffs 32-33 ARERA water services activities 33-37 ARERA electricity services activities Energy Infrastructures Operating Segment 37-39 ARERA electricity services activities Commercial and Trading Segment 39–44 Independent Auditors’ Report 244–256
Q1 2020 Press Release Page number(s) Acea: Board of Directors approves Results for Q1 2020 1-2 Acea Group Results for Q1 2020 2-4 Significant Events during the First Quarter and After 31 March 2020 4 Outlook 4-5 Consolidated Income Statement at 31 March 2020 6 Consolidated Statement of Financial Position at 31 March 2020 7 Statement of Changes in Shareholders’ Equity 8 Reclassified Consolidated Statement of Financial Position at 31 March 2020 9 Analysis of Consolidated Net Debt at 31 March 2020 10 Statement of Consolidated Cash Flows for the period ended 31 March 2020 11
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FINAL TERMS AND DRAWDOWN PROSPECTUSES
In this section the expression "necessary information" means, in relation to any Tranche of Notes, the information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the Issuer and of the rights attaching to the Notes. In relation to the different types of Notes which may be issued under the Programme the Issuer has included in this Base Prospectus all of the necessary information except for information relating to the Notes which is not known at the date of this Base Prospectus and which can only be determined at the time of an individual issue of a Tranche of Notes.
Any information relating to the Notes which is not included in this Base Prospectus and which is required in order to complete the necessary information in relation to a Tranche of Notes will be contained either in the relevant Final Terms or in a Drawdown Prospectus.
For a Tranche of Notes which is the subject of Final Terms, those Final Terms will, for the purposes of that Tranche only, complete this Base Prospectus and must be read in conjunction with this Base Prospectus. The terms and conditions applicable to any particular Tranche of Notes which is the subject of Final Terms are the Conditions described in the relevant Final Terms as completed to the extent described in the relevant Final Terms.
The terms and conditions applicable to any particular Tranche of Notes which is the subject of a Drawdown Prospectus will be the Conditions as supplemented, amended and/or replaced to the extent described in the relevant Drawdown Prospectus. In the case of a Tranche of Notes which is the subject of a Drawdown Prospectus, each reference in this Base Prospectus to information being specified or identified in the relevant Final Terms shall be read and construed as a reference to such information being specified or identified in the relevant Drawdown Prospectus unless the context requires otherwise.
Each Drawdown Prospectus will be constituted by a single document containing the necessary information relating to the Issuer and the relevant Notes, including any sections of the Base Prospectus which may be incorporated by reference therein.
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FORMS OF THE NOTES
Each Tranche of Notes will initially be in the form of either a temporary global note (the "Temporary Global Note"), without interest coupons, or a permanent global note (the "Permanent Global Note"), without interest coupons, in each case as specified in the relevant Final Terms. Each Temporary Global Note or, as the case may be, Permanent Global Note (each a "Global Note") which is not intended to be issued in new global note ("NGN") form, as specified in the relevant Final Terms, will be deposited on or around the issue date of the relevant Tranche of the Notes with a depositary or a common depositary for Euroclear Bank SA/NV as operator of the Euroclear System ("Euroclear") and/or Clearstream Banking SA ("Clearstream") and/or any other relevant clearing system and each Global Note which is intended to be issued in NGN form, as specified in the relevant Final Terms, will be deposited on or around the issue date of the relevant Tranche of the Notes with a common safekeeper for Euroclear and/or Clearstream.
Where the Global Notes issued in respect of any Tranche are in NGN form, the applicable Final Terms will also indicate whether such Global Notes are intended to be held in a manner which would allow Eurosystem eligibility. Any indication that the Global Notes are to be so held does not necessarily mean that the Notes of the relevant Tranche will be recognised as eligible collateral for Eurosystem monetary policy and intra-day credit operations by the Eurosystem either upon issue or at any times during their life as such recognition depends upon satisfaction of the Eurosystem eligibility criteria. The Common Safekeeper for NGNs will either be Euroclear or Clearstream, Luxembourg or another entity approved by Euroclear and Clearstream, Luxembourg, as indicated in the applicable Final Terms.
Whilst any Note is represented by a Temporary Global Note, payments of principal, interest (if any) and any other amount payable in respect of the Notes due prior to the Exchange Date (as defined below) will be made (against presentation of the Temporary Global Note if the Temporary Global Note is not intended to be issued in NGN form) only to the extent that certification (in a form to be provided) to the effect that the beneficial owners of interests in such Note are not U.S. persons or persons who have purchased for resale to any U.S. person, as required by U.S. Treasury regulations, has been received by Euroclear and/or Clearstream, Luxembourg and Euroclear and/or Clearstream, Luxembourg, as applicable, has given a like certification (based on the certifications it has received) to the Agent.
On 13 June 2006 the European Central Bank (the "ECB") announced that Notes in NGN form are in compliance with the "Standards for the use of EU securities settlement systems in ESCB credit operations" of the central banking system for the euro (the "Eurosystem"), provided that certain other criteria are fulfilled. At the same time the ECB also announced that arrangements for Notes in NGN form will be offered by Euroclear and Clearstream as of 30 June 2006 and that debt securities in global bearer form issued through Euroclear and Clearstream after 31 December 2006 will only be eligible as collateral for Eurosystem operations if the NGN form is used.
The relevant Final Terms will also specify whether United States Treasury Regulation §1.163- 5(c)(2)(i)(C) (the "TEFRA C Rules") or United States Treasury Regulation §1.163-5(c)(2)(i)(D) (the "TEFRA D Rules") are applicable in relation to the Notes or, if the Notes do not have a maturity of more than 365 days, that neither the TEFRA C Rules nor the TEFRA D Rules are applicable.
Temporary Global Note exchangeable for Permanent Global Notes
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If the relevant Final Terms specifies the form of Notes as being "Temporary Global Note exchangeable for a Permanent Global Note", then the Notes will initially be in the form of a Temporary Global Note which will be exchangeable, in whole or in part, for interests in a Permanent Global Note, without interest coupons, not earlier than 40 days after the issue date of the relevant Tranche of the Notes upon certification as to non-U.S. beneficial ownership. No payments will be made under the Temporary Global Note unless exchange for interests in the Permanent Global Note is improperly withheld or refused. In addition, interest payments in respect of the Notes cannot be collected without such certification of non-U.S. beneficial ownership.
Whenever any interest in the Temporary Global Note is to be exchanged for an interest in a Permanent Global Note, the Issuer shall procure (in the case of first exchange) the delivery of a Permanent Global Note to the bearer of the Temporary Global Note or (in the case of any subsequent exchange) an increase in the principal amount of the Permanent Global Note in accordance with its terms against:
(i) presentation and (in the case of final exchange) presentation and surrender of the Temporary Global Note to or to the order of the Fiscal Agent; and
(ii) receipt by the Fiscal Agent of a certificate or certificates of non-U.S. beneficial ownership.
The principal amount of Notes represented by the Permanent Global Note shall be equal to the aggregate of the principal amounts specified in the certificates of non-U.S. beneficial ownership provided, however, that in no circumstances shall the principal amount of Notes represented by the Permanent Global Note exceed the initial principal amount of Notes represented by the Temporary Global Note.
If:
(a) the Permanent Global Note has not been delivered or the principal amount thereof increased by 5.00 p.m. (London time) on the seventh day after the bearer of the Temporary Global Note has requested exchange of an interest in the Temporary Global Note for an interest in a Permanent Global Note; or
(b) the Temporary Global Note (or any part thereof) has become due and payable in accordance with the Terms and Conditions of the Notes or the date for final redemption of the Temporary Global Note has occurred and, in either case, payment in full of the amount of principal falling due with all accrued interest thereon has not been made to the bearer of the Temporary Global Note in accordance with the terms of the Temporary Global Note on the due date for payment, then the Temporary Global Note (including the obligation to deliver a Permanent Global Note) will become void at 5.00 p.m. (London time) on such seventh day (in the case of paragraph (a) above) or at 5.00 p.m. (London time) on such due date (in the case of paragraph (b) above) and the bearer of the Temporary Global Note will have no further rights thereunder (but without prejudice to the rights which the bearer of the Temporary Global Note or others may have under the Deed of Covenant).
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The Permanent Global Note will become exchangeable, in whole but not in part only and at the request of the bearer of the Permanent Global Note, for Bearer Notes in definitive form ("Definitive Notes"):
(a) on the expiry of such period of notice as may be specified in the Final Terms; or
(b) at any time, if so specified in the Final Terms; or
(c) if the Final Terms specifies "in the limited circumstances described in the Permanent Global Note", then if either of the following events occurs:
(i) Euroclear or Clearstream or any other relevant clearing system is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business; or
(ii) any of the circumstances described in Condition 12 (Events of Default) occurs.
Whenever the Permanent Global Note is to be exchanged for Definitive Notes, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Notes, duly authenticated and with Coupons and Talons attached (if so specified in the Final Terms), in an aggregate principal amount equal to the principal amount of Notes represented by the Permanent Global Note to the bearer of the Permanent Global Note against the surrender of the Permanent Global Note to or to the order of the Fiscal Agent within 30 days of the bearer requesting such exchange.
If:
(a) Definitive Notes have not been duly delivered by 5.00 p.m. (London time) on the thirtieth day after the bearer has requested exchange of the Permanent Global Note for Definitive Notes; or
(b) the Permanent Global Note was originally issued in exchange for part only of a Temporary Global Note representing the Notes and such Temporary Global Note becomes void in accordance with its terms; or
(c) the Permanent Global Note (or any part thereof) has become due and payable in accordance with the Terms and Conditions of the Notes or the date for final redemption of the Permanent Global Note has occurred and, in either case, payment in full of the amount of principal falling due with all accrued interest thereon has not been made to the bearer in accordance with the terms of the Permanent Global Note on the due date for payment, then the Permanent Global Note (including the obligation to deliver Definitive Notes) will become void at 5.00 p.m. (London time) on such thirtieth day (in the case of paragraph (a) above) or at 5.00 p.m. (London time) on the date on which such Temporary Global Note becomes void (in the case of paragraph (b) above) or at 5.00 p.m. (London time) on such due date (in the case of paragraph (c) above) and the bearer of the Permanent Global Note will have no further rights thereunder (but without prejudice to the rights which the bearer of the Permanent Global Note or others may have under the Deed of Covenant).
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Temporary Global Note exchangeable for Definitive Notes
If the relevant Final Terms specifies the form of Notes as being "Temporary Global Note exchangeable for Definitive Notes" and also specifies that the TEFRA C Rules are applicable or that neither the TEFRA C Rules or the TEFRA D Rules are applicable, then the Notes will initially be in the form of a Temporary Global Note which will be exchangeable, in whole but not in part, for Definitive Notes not earlier than 40 days after the issue date of the relevant Tranche of the Notes.
If the relevant Final Terms specifies the form of Notes as being "Temporary Global Note exchangeable for Definitive Notes" and also specifies that the TEFRA D Rules are applicable, then the Notes will initially be in the form of a Temporary Global Note which will be exchangeable, in whole or in part, for Definitive Notes not earlier than 40 days after the issue date of the relevant Tranche of the Notes upon certification as to non-U.S. beneficial ownership. Interest payments in respect of the Notes cannot be collected without such certification of non-U.S. beneficial ownership.
Whenever the Temporary Global Note is to be exchanged for Definitive Notes, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Notes, duly authenticated and with Coupons and Talons attached (if so specified in the relevant Final Terms), in an aggregate principal amount equal to the principal amount of the Temporary Global Note to the bearer of the Temporary Global Note against the surrender of the Temporary Global Note to or to the order of the Fiscal Agent within 30 days of the bearer requesting such exchange.
If:
(a) Definitive Notes have not been duly delivered by 5.00 p.m. (London time) on the thirtieth day after the bearer has requested exchange of the Temporary Global Note for Definitive Notes; or
(b) the Temporary Global Note (or any part thereof) has become due and payable in accordance with the Terms and Conditions of the Notes or the date for final redemption of the Temporary Global Note has occurred and, in either case, payment in full of the amount of principal falling due with all accrued interest thereon has not been made to the bearer in accordance with the terms of the Temporary Global Note on the due date for payment, then the Temporary Global Note (including the obligation to deliver Definitive Notes) will become void at 5.00 p.m. (London time) on such thirtieth day (in the case of paragraph (a) above) or at 5.00 p.m. (London time) on such due date (in the case of paragraph (b) above) and the bearer of the Temporary Global Note will have no further rights thereunder (but without prejudice to the rights which the bearer of the Temporary Global Note or others may have under the Deed of Covenant).
Permanent Global Note exchangeable for Definitive Notes
If the relevant Final Terms specifies the form of Notes as being "Permanent Global Note exchangeable for Definitive Notes", then the Notes will initially be in the form of a Permanent Global Note which will be exchangeable in whole, but not in part, for Definitive Notes:
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(a) on the expiry of such period of notice as may be specified in the relevant Final Terms; or
(b) at any time, if so specified in the relevant Final Terms; or
(c) if the relevant Final Terms specifies "in the limited circumstances described in the Permanent Global Note", then if either of the following events occurs:
(i) Euroclear or Clearstream or any other relevant clearing system is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business; or
(ii) any of the circumstances described in Condition 12 (Events of Default) occurs.
Whenever the Permanent Global Note is to be exchanged for Definitive Notes, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Notes, duly authenticated and with Coupons and Talons attached (if so specified in the Final Terms), in an aggregate principal amount equal to the principal amount of Notes represented by the Permanent Global Note to the bearer of the Permanent Global Note against the surrender of the Permanent Global Note to or to the order of the Fiscal Agent within 30 days of the bearer requesting such exchange.
If:
(a) Definitive Notes have not been duly delivered by 5.00 p.m. (London time) on the thirtieth day after the bearer has requested exchange of the Permanent Global Note for Definitive Notes; or
(b) the Permanent Global Note (or any part thereof) has become due and payable in accordance with the Terms and Conditions of the Notes or the date for final redemption of the Permanent Global Note has occurred and, in either case, payment in full of the amount of principal falling due with all accrued interest thereon has not been made to the bearer in accordance with the terms of the Permanent Global Note on the due date for payment, then the Permanent Global Note (including the obligation to deliver Definitive Notes) will become void at 5.00 p.m. (London time) on such thirtieth day (in the case of paragraph (a) above) or at 5.00 p.m. (London time) on such due date (in the case of paragraph (b) above) and the bearer of the Permanent Global Note will have no further rights thereunder (but without prejudice to the rights which the bearer of the Permanent Global Note or others may have under the Deed of Covenant).
Rights under Deed of Covenant
Under the Deed of Covenant, persons shown in the records of Euroclear and/or Clearstream and/or any other relevant clearing system as being entitled to an interest in a Temporary Global Note or a Permanent Global Note which becomes void will acquire directly against the Issuer all those rights to which they would have been entitled if, immediately before the Temporary Global Note or Permanent Global Note became void, they had been the holders of Definitive Notes in an aggregate principal amount equal to the principal amount of Notes they were shown as holding in the records of Euroclear and/or Clearstream and/or any other relevant clearing system.
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Terms and Conditions applicable to the Notes
The terms and conditions applicable to any Definitive Note will be endorsed on that Note and will consist of the terms and conditions set out under "Terms and Conditions of the Notes" below and the provisions of the relevant Final Terms which complete those terms and conditions.
The terms and conditions applicable to any Note in global form will differ from those terms and conditions which would apply to the Note were it in definitive form to the extent described under "Overview of Provisions Relating to the Notes while in Global Form" below.
Legend concerning United States persons
In the case of any Tranche of Bearer Notes having a maturity of more than 365 days, the Notes in global form, the Notes in definitive form and any Coupons and Talons appertaining thereto will bear a legend to the following effect:
"Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code."
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TERMS AND CONDITIONS OF THE NOTES
The following is the text of the terms and conditions which, as completed by the relevant Final Terms, will be endorsed on each Note in definitive form issued under the Programme. In the case of any Tranche of Notes which are being (a) offered to the public in a Member State (other than pursuant to one or more of the exemptions set out in Article 3 of the Prospectus Regulation) or (b) admitted to trading on a regulated market in a Member State, the relevant Final Terms shall not amend or replace any information in this Base Prospectus. Subject to this, to the extent permitted by applicable law and/or regulation, the Final Terms in respect of any Tranche of Notes may complete any information any information in this Base Prospectus.
The terms and conditions applicable to any Note in global form will differ from those terms and conditions which would apply to the Note were it in definitive form to the extent described under "Overview of Provisions Relating to the Notes while in Global Form" below.
1. Introduction
(a) Programme: Acea S.p.A. (the "Issuer") has established a Euro Medium Term Note Programme (the "Programme") for the issuance of up to €4,000,000,000 in aggregate principal amount of notes (the "Notes").
(b) Final Terms: Notes issued under the Programme are issued in series (each a "Series") and each Series may comprise one or more tranches (each a "Tranche") of Notes. Each Tranche is the subject of a final terms (the "Final Terms") which completes these terms and conditions (the "Conditions"). The terms and conditions applicable to any particular Tranche of Notes are these Conditions as completed by the relevant Final Terms. In the event of any inconsistency between these Conditions and the relevant Final Terms, the relevant Final Terms shall prevail.
(c) Agency Agreement: The Notes are the subject of an issue and paying agency agreement dated 24 July 2020 (the "Agency Agreement") between the Issuer and BNP Paribas Securities Services, Luxembourg Branch, as fiscal agent (the "Fiscal Agent", which expression includes any successor fiscal agent appointed from time to time in connection with the Notes) and the paying agents named therein (together with the Fiscal Agent, the "Paying Agents", which expression includes any successor or additional paying agents appointed from time to time in connection with the Notes).
(d) The Notes: All subsequent references in these Conditions to "Notes" are to the Notes which are the subject of the relevant Final Terms. Copies of the relevant Final Terms are available for viewing at the specified office of the Fiscal Agent, the initial specified office of which is set out below.
(e) Summaries: Certain provisions of these Conditions are summaries of the Agency Agreement and are subject to their detailed provisions. The holders of the Notes (the "Noteholders") and the holders of the related interest coupons, if any, (the "Couponholders" and the "Coupons", respectively) are bound by, and are deemed to have notice of, all the provisions of the Agency Agreement applicable to them. Copies of the Agency Agreement are available for inspection by Noteholders during normal business hours at the Specified Offices of each of the Paying Agents, the initial Specified Offices of which are set out below.
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2. Interpretation
(a) Definitions: In these Conditions the following expressions have the following meanings:
"Accrual Yieldˮ has the meaning given in the relevant Final Terms;
"Additional Business Centre(s)ˮ means the city or cities specified as such in the relevant Final Terms;
"Additional Financial Centre(s)ˮ means the city or cities specified as such in the relevant Final Terms;
"Business Day" means:
(a) in relation to any sum payable in Euro, a TARGET Settlement Day and a day on which commercial banks and foreign exchange markets settle payments generally in Luxembourg and each (if any) Additional Business Centre; and
(b) in relation to any sum payable in a currency other than Euro, a day on which commercial banks and foreign exchange markets settle payments generally in London, Luxembourg, in the Principal Financial Centre of the relevant currency and in each (if any) Additional Business Centre;
"Business Day Convention", in relation to any particular date, has the meaning given in the relevant Final Terms and, if so specified in the relevant Final Terms, may have different meanings in relation to different dates and, in this context, the following expressions shall have the following meanings:
(a) "Following Business Day Convention" means that the relevant date shall be postponed to the first following day that is a Business Day;
(b) "Modified Following Business Day Convention" or "Modified Business Day Convention" means that the relevant date shall be postponed to the first following day that is a Business Day unless that day falls in the next calendar month in which case that date will be the first preceding day that is a Business Day;
(c) "Preceding Business Day Convention" means that the relevant date shall be brought forward to the first preceding day that is a Business Day;
(d) "FRN Convention", "Floating Rate Convention" or "Eurodollar Convention" means that each relevant date shall be the date which numerically corresponds to the preceding such date in the calendar month which is the number of months specified in the relevant Final Terms as the Specified Period after the calendar month in which the preceding such date occurred provided, however, that:
(i) if there is no such numerically corresponding day in the calendar month in which any such date should occur, then such date will be the last day which is a Business Day in that calendar month;
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(ii) if any such date would otherwise fall on a day which is not a Business Day, then such date will be the first following day which is a Business Day unless that day falls in the next calendar month, in which case it will be the first preceding day which is a Business Day; and
(iii) if the preceding such date occurred on the last day in a calendar month which was a Business Day, then all subsequent such dates will be the last day which is a Business Day in the calendar month which is the specified number of months after the calendar month in which the preceding such date occurred; and
(e) "No Adjustment" means that the relevant date shall not be adjusted in accordance with any Business Day Convention;
"Calculation Agent" means the Fiscal Agent or such other Person specified in the relevant Final Terms as the party responsible for calculating the Rate(s) of Interest and Interest Amount(s) and/or such other amount(s) as may be specified in the relevant Final Terms;
"Calculation Amount" has the meaning given in the relevant Final Terms; a "Change of Control" will be deemed to occur if more than 50 per cent. of the share capital of the Issuer, or more than 50 per cent. of the voting rights normally exercisable at a general meeting of the Issuer, is acquired by any person or Persons (other than the Reference Shareholder) acting in concert; a "Change of Control Put Event" will be deemed to occur if:
(a) a Change of Control occurs; and
(b) at the time of the occurrence of the Change of Control, the Notes carry any of the following:
(i) an investment grade credit rating (BBB-/Baa3/BBB-, or equivalent, or better), and such rating from any Rating Agency is within 180 days of the occurrence of the Change of Control either downgraded to a non- investment grade credit rating (BB+/Ba1/BB+, or equivalent, or worse) or withdrawn and is not within such 180-day period subsequently (in the case of a downgrade) upgraded to an investment grade credit rating by such Rating Agency or (in the case of a withdrawal) replaced by an investment grade credit rating from any other Rating Agency; or
(ii) a non-investment grade credit rating (BB+/Ba1/BB+, or equivalent, or worse), and such rating from any Rating Agency is within 180 days of the occurrence of the Change of Control downgraded by one or more notches (for illustration, Ba1 to Ba2 being one notch) and is not within such 180-day period subsequently upgraded to its earlier credit rating or better by such Rating Agency; or
(iii) no credit rating, and no Rating Agency assigns within 90 days of the occurrence of the Change of Control an investment grade credit rating to the Notes
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(each, a "Rating Event"); and
(c) in making the relevant decision(s) referred to above, the relevant Rating Agency announces publicly or confirms in writing to the Issuer that such decision(s) resulted, in whole or in part, from the occurrence of the Change of Control;
"Control" will have the meaning set forth in Article 93 of Italian Legislative Decree No. 58 of 24 February 1998 and the relevant implementing regulations;
"Coupon Sheet" means, in respect of a Note, a coupon sheet relating to the Note;
"Day Count Fraction" means, in respect of the calculation of an amount for any period of time (the "Calculation Period"), such day count fraction as may be specified in these Conditions or the relevant Final Terms and:
(a) if "Actual/Actual (ICMA )" is so specified, means:
(i) where the Calculation Period is equal to or shorter than the Regular Period during which it falls, the actual number of days in the Calculation Period divided by the product of (1) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year; and
(ii) where the Calculation Period is longer than one Regular Period, the sum of:
(A) the actual number of days in such Calculation Period falling in the Regular Period in which it begins divided by the product of (1) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year; and
(B) the actual number of days in such Calculation Period falling in the next Regular Period divided by the product of (a) the actual number of days in such Regular Period and (2) the number of Regular Periods in any year;
(iii) "Actual/Actual (ISDA)" is so specified, means the actual number of days in the Calculation Period divided by 365 (or, if any portion of the Calculation Period falls in a leap year, the sum of (A) the actual number of days in that portion of the Calculation Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Calculation Period falling in a non-leap year divided by 365);
(iv) if "Actual/365 (Fixed)" is so specified, means the actual number of days in the Calculation Period divided by 365;
(v) if "Actual/360" is so specified, means the actual number of days in the Calculation Period divided by 360;
(vi) if "30/360" is so specified, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows
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Day Count Fraction = [360x(Y2 − Y1 )] + [30x(M 2 − M 1 )] + (D2 − D1 ) 360 where:
"Y1" is the year, expressed as a number, in which the first day of the Calculation Period falls;
"Y2" is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
"M1" is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
"M2" is the calendar month, expressed as number, in which the day immediately following the last day included in the Calculation Period falls;
"D1" is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D1 will be 30; and
"D2" is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31 and D1 is greater than 29, in which case D2 will be 30";
(vii) if "30E/360" or "Eurobond Basis" is so specified, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360x(Y2 − Y1 )] + [30x(M 2 − M 1 )] + (D2 − D1 ) 360 where:
"Y1" is the year, expressed as a number, in which the first day of the Calculation Period falls;
"Y2" is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
"M1" is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
"M2" is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
"D1" is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D1 will be 30; and
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"D2" is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31, in which case D2 will be 30; and
(viii) if "30E/360 (ISDA)" is so specified, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360x(Y2 − Y1 )] + [30x(M 2 − M 1 )] + (D2 − D1 ) 360 where:
"Y1" is the year, expressed as a number, in which the first day of the Calculation Period falls;
"Y2" is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
"M1" is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
"M2" is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
"D1" is the first calendar day, expressed as a number, of the Calculation Period, unless (i) that day is the last day of February or (ii) such number would be 31, in which case D1 will be 30; and
"D2" is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless (i) that day is the last day of February but not the Maturity Date or (ii) such number would be 31, in which case D2 will be 30,
provided, however, that in each such case the number of days in the Calculation Period is calculated from and including the first day of the Calculation Period to but excluding the last day of the Calculation Period;
"Early Redemption Amount (Tax)" means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, the relevant Final Terms;
"Early Termination Amount" means, in respect of any Note, its principal amount or such other amount as may be specified in, or determined in accordance with, these Conditions or the relevant Final Terms;
"EURIBOR" means, in respect of any specified currency and any specified period, the interest rate benchmark known as the Euro zone interbank offered rate which is calculated and published by a designated distributor (currently Thomson Reuters) in accordance with the requirements from time to time of the European Banking
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Federation based on estimated interbank borrowing rates for a number of designated currencies and maturities which are provided, in respect of each such currency, by a panel of contributor banks (details of historic EURIBOR rates can be obtained from the designated distributor);
"Extraordinary Resolution" has the meaning given in the Agency Agreement;
"Final Redemption Amount" means, in respect of any Note, its principal amount or such other amount as may be specified in the relevant Final Terms;
"First Interest Payment Date" means the date specified in the relevant Final Terms;
"Fixed Coupon Amount" has the meaning given in the relevant Final Terms;
"Group" means the Issuer and its Subsidiaries;
"Indebtedness" shall be construed so as to include any obligation for the payment or repayment of money, whether present or future, actual or contingent;
"Indebtedness for Borrowed Money" means any present or future Indebtedness for money borrowed;
"Interest Amount" means, in relation to a Note and an Interest Period, the amount of interest payable in respect of that Note for that Interest Period;
"Interest Commencement Date" means the Issue Date of the Notes or such other date as may be specified as the Interest Commencement Date in the relevant Final Terms;
"Interest Determination Date" has the meaning given in the relevant Final Terms;
"Interest Payment Date" means the First Interest Payment Date and any other date or dates specified as such in, or determined in accordance with the provisions of, the relevant Final Terms and, if a Business Day Convention is specified in the relevant Final Terms:
(a) as the same may be adjusted in accordance with the relevant Business Day Convention; or
(b) if the Business Day Convention is the FRN Convention, Floating Rate Convention or Eurodollar Convention and an interval of a number of calendar months is specified in the relevant Final Terms as being the Specified Period, each of such dates as may occur in accordance with the FRN Convention, Floating Rate Convention or Eurodollar Convention at such Specified Period of calendar months following the Interest Commencement Date (in the case of the first Interest Payment Date) or the previous Interest Payment Date (in any other case);
"Interest Period" means each period beginning on (and including) the Interest Commencement Date or any Interest Payment Date and ending on (but excluding) the next Interest Payment Date;
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"Investment Grade Rating" means a rating of Baa3 by Moody’s Investors Service España, S.A and/or BBB- by Fitch Italia S.p.A. or any successor to any of them from time to time;
"ISDA Definitions" means the 2000 ISDA Definitions (as amended and updated as at the date of issue of the first Tranche of the Notes of the relevant Series (as specified in the relevant Final Terms) as published by the International Swaps and Derivatives Association, Inc.) or, if so specified in the relevant Final Terms, the 2006 ISDA Definitions (as amended and updated as at the date of issue of the first Tranche of the Notes of the relevant Series (as specified in the relevant Final Terms) as published by the International Swaps and Derivatives Association, Inc.);
"Issue Date" has the meaning given in the relevant Final Terms;
"LIBOR" means, in respect of any specified currency and any specified period, the interest rate benchmark known as the London interbank offered rate which is calculated and published by a designated distributor (currently Thomson Reuters) in accordance with the requirements from time to time of the British Bankers’ Association (or any other person which takes over the administration of that rate) based on estimated interbank borrowing rates for a number of designated currencies and maturities which are provided, in respect of each such currency, by a panel of contributor banks (details of historic LIBOR rates can be obtained from the designated distributor);
"Make-Whole Amount" means, in respect of any Note, as determined by the Reference Dealers, the sum of the then current values of the remaining scheduled payments of principal and interest on the Note (not including any interest accrued on the Note to, but excluding, the Optional Redemption Date (Call)) discounted to the Optional Redemption Date (Call) on an annual basis (based on the actual number of days elapsed divided by 365 or (in the case of a leap year) 366) at the Reference Bond Rate plus the Redemption Margin;
"Margin" has the meaning given in the relevant Final Terms; a "material part" means 15 per cent. or more by value of the whole;
"Material Subsidiary" at any time shall include a Subsidiary of the Issuer (inter alia): (a) whose revenues (consolidated in the case of a Subsidiary which itself has Subsidiaries and without taking into account intra-group revenues) or whose total assets (consolidated in the case of a Subsidiary which itself has Subsidiaries and without taking into account assets due to intra-group transactions) represent not less than 10 per cent. of the consolidated revenues or, as the case may be, consolidated total assets of the Issuer and its consolidated Subsidiaries taken as a whole, all as calculated respectively by reference to the then latest audited accounts (consolidated or, as the case may be, unconsolidated) of the Subsidiary and the then latest audited consolidated accounts of the Issuer and its consolidated Subsidiaries; or (b) to which is transferred the whole or substantially the whole of the undertaking and assets of a Subsidiary of the Issuer which immediately before the transfer is a Material Subsidiary;
"Maturity Date" has the meaning given in the relevant Final Terms;
"Maximum Redemption Amount" has the meaning given in the relevant Final Terms;
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"Minimum Rating" means:
(a) if, immediately prior to the announcement of the amalgamation, reorganisation, merger, demerger, consolidation or restructuring of the Issuer, the Notes carried a credit rating equal to or higher than an Investment Grade Rating, the higher of (1) an Investment Grade Rating, and (2) a credit rating that is not more than 3 notches lower than the rating assigned by the Rating Agencies to, or carried by, the Notes immediately prior to the announcement of the amalgamation, reorganisation, merger, demerger, consolidation or restructuring of the Issuer;
(b) if, immediately prior to the announcement of the amalgamation, reorganisation, merger, demerger, consolidation or restructuring of the Issuer, the Notes carried a credit rating lower than an Investment Grade Rating, a credit rating that is not lower than the rating assigned by the Rating Agencies to, or carried by, the Notes immediately prior to the announcement of the amalgamation, reorganisation, merger, demerger, consolidation or restructuring of the Issuer;
"Minimum Redemption Amount" has the meaning given in the relevant Final Terms;
"Optional Redemption Amount (Call)" means, in respect of any Note, a redemption amount per Note equal to 100 per cent. of the nominal amount of the Notes or a redemption amount per Note equal to the greater of 100 per cent. of the nominal amount of the Notes and the Make-Whole Amount, as may be specified in the relevant Final Terms;
"Optional Redemption Amount (Put)" means, in respect of any Note, its principal amount or such other amount as may be specified in the relevant Final Terms;
"Optional Redemption Date (Call)" has the meaning given in the relevant Final Terms;
"Optional Redemption Date (Put)" has the meaning given in the relevant Final Terms;
"Participating Member State" means a Member State of the European Communities which adopts the euro as its lawful currency in accordance with the Treaty;
"Payment Business Day" means:
(a) if the currency of payment is euro, any day which is:
(i) a day on which banks in the relevant place of presentation are open for presentation and payment of bearer debt securities and for dealings in foreign currencies; and
(ii) in the case of payment by transfer to an account, a TARGET Settlement Day and a day on which dealings in foreign currencies may be carried on in each (if any) Additional Financial Centre; or
(b) if the currency of payment is not euro, any day which is:
(i) a day on which banks in the relevant place of presentation are open for presentation and payment of bearer debt securities and for dealings in foreign currencies; and
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(ii) in the case of payment by transfer to an account, a day on which dealings in foreign currencies may be carried on in the Principal Financial Centre of the currency of payment and in each (if any) Additional Financial Centre;
"Permitted Reorganisation" means an amalgamation, reorganisation, merger, demerger, consolidation or restructuring whilst solvent whereby the assets and undertaking of the Issuer (or, in the case of a demerger, all or substantially all of such assets and undertaking) are vested in a body corporate in good standing and (A) such body corporate (i) assumes or, if the surviving entity is the Issuer, maintains liability as principal debtor in respect of the Notes and (ii) continues substantially to carry on the business of the Issuer as reported in the Issuer’s most recently published audited financial statements immediately prior to the amalgamation, reorganisation, merger, demerger, consolidation or restructuring; and (B) following the completion of the amalgamation, reorganisation, merger, demerger, consolidation or restructuring, the Notes continue to carry by each Rating Agency that rated the Notes prior to the announcement of the amalgamation, reorganisation, merger, demerger, consolidation or restructuring a rating at least equal to the Minimum Rating;
"Permitted Security Interest" means:
(a) any Security Interest arising solely by operation of law;
(b) any Security Interest existing over the assets of a company which becomes a Material Subsidiary of the Issuer after the date of the relevant Final Terms where such Security Interest already exists at the time that such a company becomes a Material Subsidiary of the Issuer (provided that such Security Interest was not created in contemplation of, or in connection with, that company becoming a Material Subsidiary of the Issuer and provided further that the amounts secured have not been increased in contemplation of, or in connection with, that company becoming a Material Subsidiary of the Issuer); and
(c) any Security Interest to secure Relevant Indebtedness upon, or with respect to, any of its present or future assets (including receivables) or revenues or any part thereof which is created pursuant to any securitisation, asset backed financing or like arrangement, including, for the avoidance of doubt, Project Finance Indebtedness (as defined below), whereby all payment obligations in respect of the Relevant Indebtedness or any guarantee of or indemnity in respect of the Relevant Indebtedness, as the case may be, secured by such Security Interest or having the benefit of such secured guarantee or other indemnity, are to be discharged solely from such assets (including receivables) or revenues;
(d) any Security Interest in existence on the relevant Issue Date of each Series of Notes, provided that the principal amount secured by the Security Interest is not subsequently increased and the Security Interest remains limited to all or part of the same property and assets that originally secured the Security Interest; and
(e) any Security Interest created in substitution of any security permitted under paragraphs (a) to (d) above, provided that the principal amount secured by the substitute Security Interest does not exceed the principal amount secured by the initial Security Interest.
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"Person" means any individual, company, corporation, firm, partnership, joint venture, association, organisation, state or agency of a state or other entity, whether or not having separate legal personality;
"Persons Acting in Concert" will have the meaning set forth in Article 101-bis of Italian Legislative Decree No. 58 of 24 February 1998 and relevant implementing measures;
"Principal Financial Centre" means, in relation to any currency, the principal financial centre for that currency provided, however, that:
(a) in relation to euro, it means the principal financial centre of such Member State of the European Communities as is selected (in the case of a payment) by the payee or (in the case of a calculation) by the Calculation Agent; and
(b) in relation to New Zealand dollars, it means either Wellington or Auckland as is selected (in the case of a payment) by the payee or (in the case of a calculation) by the Calculation Agent;
"Project Finance Indebtedness" means any present or future Indebtedness incurred in financing the acquisition, development, leasing and/or operation of an asset or assets (including, for the avoidance of doubt, concessions), whether or not an asset of a member of the Group, in respect of which the Person or Persons to whom any such Indebtedness is or may be owed by the relevant issuer (whether or not a member of the Group) has or have no recourse whatsoever to any member of the Group for the repayment thereof other than:
(a) recourse for amounts limited to the cash flow or the net cash flow (other than historic cash flow or historic net cash flow) from such asset or assets or the income or other proceeds deriving therefrom; and/or
(b) recourse for the purpose only of enabling amounts to be claimed in respect of such indebtedness in an enforcement of any Security Interest given by such issuer over such asset or assets or the income, cash flow or other proceeds, deriving therefrom (or given by any shareholder or the like, including any member of the Group, in the issuer over its shares or the like in the capital of the borrower) to secure such Relevant Indebtedness, provided that (a) the extent of such recourse is limited solely to the amount of any recoveries made on any such enforcement, and (b) such Person or Persons is/are not entitled, by virtue of any right or claim arising out of or in connection with such Indebtedness, to commence proceedings of whatever nature against any member of the Group.
"Put Option Notice" means a notice which must be delivered to a Paying Agent by any Noteholder wanting to exercise a right to redeem a Note at the option of the Noteholder;
"Put Option Receipt" means a receipt issued by a Paying Agent to a depositing Noteholder upon deposit of a Note with such Paying Agent by any Noteholder wanting to exercise a right to redeem a Note at the option of the Noteholder;
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"Rate of Interest" means the rate or rates (expressed as a percentage per annum) of interest payable in respect of the Notes specified in the relevant Final Terms or calculated or determined in accordance with the provisions of these Conditions and/or the relevant Final Terms;
"Rating Agency" means each of Moody’s Investors Service España, S.A. and Fitch Italia S.p.A. and any of their respective successors; and
"Redemption Amount" means, as appropriate, the Final Redemption Amount, the Early Redemption Amount (Tax), the Optional Redemption Amount (Call), the Optional Redemption Amount (Put), the Early Termination Amount or such other amount in the nature of a redemption amount as may be specified in the relevant Final Terms;
"Redemption Margin" has the meaning given in the relevant Final Terms;
"Reference Banks" has the meaning given in the relevant Final Terms or, if none, four major banks selected by the Issuer and/or an independent advisor in the market that is most closely connected with the Reference Rate;
"Reference Bond" has the meaning given in the relevant Final Terms;
"Reference Bond Rate" means, with respect to the Reference Dealers and the Optional Redemption Date (Call), the average of the five quotations of the mid-market annual yield to maturity of the Reference Bond or, if the Reference Bond is no longer outstanding, a similar security in the reasonable judgement of the Reference Dealers at 11.00 a.m. (London time) on the third business day in London preceding the Optional Redemption Date (Call) quoted in writing to the Issuer by the Reference Dealers;
"Reference Dealers" has the meaning given in the relevant Final Terms or, if none, two independent and internationally recognised dealer in obligations similar to the Notes selected by the Issuer;
"Reference Price" has the meaning given in the relevant Final Terms;
"Reference Rate" means EURIBOR or LIBOR as specified in the relevant Final Terms in respect of the currency and period specified in the relevant Final Terms;
"Reference Shareholder" means the Municipality of Rome.
"Regular Period" means:
(a) in the case of Notes where interest is scheduled to be paid only by means of regular payments, each period from and including the Interest Commencement Date to but excluding the first Interest Payment Date and each successive period from and including one Interest Payment Date to but excluding the next Interest Payment Date;
(b) in the case of Notes where, apart from the first Interest Period, interest is scheduled to be paid only by means of regular payments, each period from and including a Regular Date falling in any year to but excluding the next Regular
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Date, where "Regular Date" means the day and month (but not the year) on which any Interest Payment Date falls; and
(c) in the case of Notes where, apart from one Interest Period other than the first Interest Period, interest is scheduled to be paid only by means of regular payments, each period from and including a Regular Date falling in any year to but excluding the next Regular Date, where "Regular Date" means the day and month (but not the year) on which any Interest Payment Date falls other than the Interest Payment Date falling at the end of the irregular Interest Period.
"Relevant Date" means, in relation to any payment, whichever is the later of (a) the date on which the payment in question first becomes due and (b) if the full amount payable has not been received in the Principal Financial Centre of the currency of payment by the Fiscal Agent on or prior to such due date, the date on which (the full amount having been so received) notice to that effect has been given to the Noteholders;
"Relevant Financial Centre" has the meaning given in the relevant Final Terms;
"Relevant Indebtedness" means any Indebtedness which is in the form of or represented or evidenced by bonds, notes, debentures or other securities for the time being are, are intended to be (with the consent of the Issuer), or are capable of being quoted, listed or dealt in or traded on any stock exchange or over the counter of other securities market;
"Relevant Jurisdiction" means Italy or any political subdivision or any authority thereof or therein having power to tax or any other jurisdiction or any political subdivision or any authority thereof or therein having power to tax to which the Issuer is or becomes subject in respect of its income by reason of its tax residence or a permanent establishment maintained therein.
"Relevant Screen Page" means the page, section or other part of a particular information service (including, without limitation, Reuters) specified as the Relevant Screen Page in the relevant Final Terms, or such other page, section or other part as may replace it on that information service or such other information service, in each case, as may be nominated by the Person providing or sponsoring the information appearing there for the purpose of displaying rates or prices comparable to the Reference Rate;
"Relevant Time" has the meaning given in the relevant Final Terms;
"Reserved Matter" means any proposal to change any date fixed for payment of principal or interest in respect of the Notes, to reduce the amount of principal or interest payable on any date in respect of the Notes, to alter the method of calculating the amount of any payment in respect of the Notes or the date for any such payment, to change the currency of any payment under the Notes or to change the quorum requirements relating to meetings or the majority required to pass an Extraordinary Resolution;
"Security Interest" means any mortgage, charge, pledge, lien or other security interest including, without limitation, anything analogous to any of the foregoing under the laws of any jurisdiction;
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"Specified Currency" has the meaning given in the relevant Final Terms;
"Specified Denomination(s)" has the meaning given in the relevant Final Terms;
"Specified Office" has the meaning given in the Agency Agreement;
"Specified Period" has the meaning given in the relevant Final Terms;
"Subsidiary" means any entity whose financial statements at any time are required by law or in accordance with generally accepted accounting principles to be consolidated with those of the Issuer.
"substantial part" means 50 per cent. or more by value of the whole.
"Talon" means a talon for further Coupons;
"TARGET2" means the Trans-European Automated Real-Time Gross Settlement Express Transfer payment system which utilises a single shared platform and which was launched on 19 November 2007;
"TARGET Settlement Day" means any day on which TARGET2 is open for the settlement of payments in euro;
"Treaty" means the Treaty establishing the European Communities, as amended;
"Zero Coupon Note" means a Note specified as such in the relevant Final Terms.
(b) Interpretation: In these Conditions:
(i) if the Notes are Zero Coupon Notes, references to Coupons and Couponholders are not applicable;
(ii) if Talons are specified in the relevant Final Terms as being attached to the Notes at the time of issue, references to Coupons shall be deemed to include references to Talons;
(iii) if Talons are not specified in the relevant Final Terms as being attached to the Notes at the time of issue, references to Talons are not applicable;
(iv) any reference to principal shall be deemed to include the Redemption Amount, any additional amounts in respect of principal which may be payable under Condition 11 (Taxation), any premium payable in respect of a Note and any other amount in the nature of principal payable pursuant to these Conditions;
(v) any reference to interest shall be deemed to include any additional amounts in respect of interest which may be payable under Condition 11 (Taxation) and any other amount in the nature of interest payable pursuant to these Conditions;
(vi) references to Notes being "outstanding" shall be construed in accordance with the Agency Agreement;
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(vii) if an expression is stated in Condition 2(a) to have the meaning given in the relevant Final Terms, but the relevant Final Terms gives no such meaning or specifies that such expression is "not applicable" then such expression is not applicable to the Notes; and
(viii) any reference to the Agency Agreement shall be construed as a reference to the Agency Agreement, as amended and/or supplemented up to and including the Issue Date of the Notes.
3. Form, Denomination and Title
The Notes are in bearer form in the Specified Denomination(s) with Coupons and, if specified in the relevant Final Terms, Talons attached at the time of issue. In the case of a Series of Notes with more than one Specified Denomination, Notes of one Specified Denomination will not be exchangeable for Notes of another Specified Denomination. Title to the Notes and the Coupons will pass by delivery. The holder of any Note or Coupon shall (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any other interest therein, any writing thereon or any notice of any previous loss or theft thereof) and no Person shall be liable for so treating such holder. No person shall have any right to enforce any term or condition of any Note under the Contracts (Rights of Third Parties) Act 1999.
4. Status
The Notes constitute direct, unconditional and (subject to Condition 5 (Negative Pledge)) unsecured obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Issuer under the Notes shall, save for such exceptions as may be provided by applicable legislation and subject to Condition 5 (Negative Pledge), at all times rank equally with all its other present and future unsecured and unsubordinated obligations.
5. Negative Pledge
So long as any Note remains outstanding (as defined in the Fiscal Agency Agreement) the Issuer will not, and will ensure that none of its Material Subsidiaries will, create or have outstanding any Security Interest other than a Permitted Security Interest, upon the whole or any part of its present or future undertaking, assets or revenues (including any uncalled capital) to secure any Relevant Indebtedness, or payment under any guarantee or indemnity granted by the Issuer or any Material Subsidiary in respect of any Relevant Indebtedness, without at the same time or prior thereto according to the Notes the same security as is created or subsisting to secure any such Relevant Indebtedness, guarantee or indemnity or such other security as shall be approved by a Resolution (as defined in the Fiscal Agency Agreement) of the Noteholders.
6. Fixed Rate Note Provisions
(a) Application: This Condition 6 (Fixed Rate Note Provisions) is applicable to the Notes:
(i) if the Fixed Rate Note Provisions are specified in the relevant Final Terms as being applicable; or
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(ii) if the Fixed-Floating Rate Note Provisions or the Floating-Fixed Rate Note Provisions are specified in the relevant Final Terms as being applicable, in respect of those Interest Periods for which the Fixed Rate Note Provisions are stated to apply.
(b) Accrual of interest: The Notes bear interest from the Interest Commencement Date at the Rate of Interest payable in arrear on each Interest Payment Date, subject as provided in Condition 10 (Payments). Each Note will cease to bear interest from the due date for final redemption unless, upon due presentation, payment of the Redemption Amount is improperly withheld or refused, in which case it will continue to bear interest in accordance with this Condition 6 (as well after as before judgment) until whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is five days after the Fiscal Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such fifth day (except to the extent that there is any subsequent default in payment).
(c) Fixed Coupon Amount: The amount of interest payable in respect of each Note for any Interest Period shall be the relevant Fixed Coupon Amount and, if the Notes are in more than one Specified Denomination, shall be the relevant Fixed Coupon Amount in respect of the relevant Specified Denomination.
(d) Calculation of interest amount: The amount of interest payable in respect of each Note for any period for which a Fixed Coupon Amount is not specified shall be calculated by applying the Rate of Interest to the Calculation Amount, multiplying the product by the relevant Day Count Fraction, rounding the resulting figure to the nearest sub-unit of the Specified Currency (half a sub-unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of such Note divided by the Calculation Amount. For this purpose a "sub-unit" means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent.
7. Floating Rate Note Provisions
(a) Application: This Condition 7 (Floating Rate Note Provisions) is applicable to the Notes:
(i) if the Floating Rate Note Provisions are specified in the relevant Final Terms as being applicable; or
(ii) if the Fixed-Floating Rate Note Provisions or the Floating-Fixed Rate Note Provisions are specified in the relevant Final Terms as being applicable, in respect of those Interest Periods for which the Floating Rate Note Provisions are stated to apply.
(b) Accrual of interest: The Notes bear interest from the Interest Commencement Date at the Rate of Interest payable in arrear on each Interest Payment Date, subject as provided in Condition 10 (Payments). Each Note will cease to bear interest from the due date for final redemption unless, upon due presentation, payment of the Redemption Amount is improperly withheld or refused, in which case it will continue to bear interest in accordance with this Condition (as well after as before judgment) until whichever is the
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earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is five days after the Fiscal Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such fifth day (except to the extent that there is any subsequent default in payment).
(c) Screen Rate Determination: If Screen Rate Determination is specified in the relevant Final Terms as the manner in which the Rate(s) of Interest is/are to be determined, the Rate of Interest applicable to the Notes for each Interest Period will be determined by the Calculation Agent on the following basis, subject as provided in Condition 7(i) below:
(i) if the Reference Rate is a composite quotation or customarily supplied by one entity, the Calculation Agent will determine the Reference Rate which appears on the Relevant Screen Page as of the Relevant Time on the relevant Interest Determination Date;
(ii) in any other case, the Calculation Agent will determine the arithmetic mean of the Reference Rates which appear on the Relevant Screen Page as of the Relevant Time on the relevant Interest Determination Date;
(iii) if, in the case of (i) above, such rate does not appear on that page or, in the case of (ii) above, fewer than two such rates appear on that page or if, in either case, the Relevant Screen Page is unavailable:
(A) the Issuer and/or an independent advisor appointed by the Issuer will request the principal Relevant Financial Centre office of each of the Reference Banks to provide a quotation of the Reference Rate at approximately the Relevant Time on the Interest Determination Date to prime banks in the Relevant Financial Centre interbank market in an amount that is representative for a single transaction in that market at that time; and
(B) the Calculation Agent will determine the arithmetic mean of such quotations; and
(iv) if fewer than two such quotations are provided as requested, the Calculation Agent will determine the arithmetic mean of the rates (being the nearest to the Reference Rate, as determined by the Calculation Agent) quoted by major banks in the Principal Financial Centre of the Specified Currency, selected by the Calculation Agent, at approximately 11.00 a.m. (local time in the Principal Financial Centre of the Specified Currency) on the first day of the relevant Interest Period for loans in the Specified Currency to leading European banks for a period equal to the relevant Interest Period and in an amount that is representative for a single transaction in that market at that time,
and the Rate of Interest for such Interest Period shall be the sum of the Margin and the rate or (as the case may be) the arithmetic mean so determined; provided, however, that if the Calculation Agent is unable to determine a rate or (as the case may be) an arithmetic mean in accordance with the above provisions in relation to any Interest Period, the Rate of Interest applicable to the Notes during such Interest Period will be
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the sum of the Margin and the rate or (as the case may be) the arithmetic mean last determined in relation to the Notes in respect of a preceding Interest Period.
(d) ISDA Determination: If ISDA Determination is specified in the relevant Final Terms as the manner in which the Rate(s) of Interest is/are to be determined, the Rate of Interest applicable to the Notes for each Interest Period will be the sum of the Margin and the relevant ISDA Rate where "ISDA Rate" in relation to any Interest Period means a rate equal to the Floating Rate (as defined in the ISDA Definitions) that would be determined by the Calculation Agent under an interest rate swap transaction if the Calculation Agent were acting as Calculation Agent for that interest rate swap transaction under the terms of an agreement incorporating the ISDA Definitions and under which:
(i) the Floating Rate Option (as defined in the ISDA Definitions) is as specified in the relevant Final Terms;
(ii) the Designated Maturity (as defined in the ISDA Definitions) is a period specified in the relevant Final Terms; and
(iii) the relevant Reset Date (as defined in the ISDA Definitions) is either (A) if the relevant Floating Rate Option is based on the London inter-bank offered rate (LIBOR) for a currency, the first day of that Interest Period or (B) in any other case, as specified in the relevant Final Terms.
(e) Maximum or Minimum Rate of Interest: If any Maximum Rate of Interest or Minimum Rate of Interest is specified in the relevant Final Terms, then the Rate of Interest shall in no event be greater than the maximum or be less than the minimum so specified.
(f) Calculation of Interest Amount: The Calculation Agent will, as soon as practicable after the time at which the Rate of Interest is to be determined in relation to each Interest Period, calculate the Interest Amount payable in respect of each Note for such Interest Period. The Interest Amount will be calculated by applying the Rate of Interest for such Interest Period to the Calculation Amount, multiplying the product by the relevant Day Count Fraction, rounding the resulting figure to the nearest sub-unit of the Specified Currency (half a sub-unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of the relevant Note divided by the Calculation Amount. For this purpose a "sub-unit" means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent.
(g) Publication: The Calculation Agent will cause each Rate of Interest and Interest Amount determined by it, together with the relevant Interest Payment Date, and any other amount(s) required to be determined by it together with any relevant payment date(s) to be notified to the Paying Agents and each competent authority, stock exchange and/or quotation system (if any) by which the Notes have then been admitted to listing, trading and/or quotation as soon as practicable after such determination but (in the case of each Rate of Interest, Interest Amount and Interest Payment Date) in any event not later than the first day of the relevant Interest Period. Notice thereof shall also promptly be given to the Noteholders. The Calculation Agent will be entitled to recalculate any Interest Amount (on the basis of the foregoing provisions) without notice in the event of an extension or shortening of the relevant Interest Period. If the
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Calculation Amount is less than the minimum Specified Denomination the Calculation Agent shall not be obliged to publish each Interest Amount but instead may publish only the Calculation Amount and the Interest Amount in respect of a Note having the minimum Specified Denomination.
(h) Notifications etc: All notifications, opinions, determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained for the purposes of this Condition by the Calculation Agent will (in the absence of manifest error) be binding on the Issuer, the Paying Agents, the Noteholders and the Couponholders and (subject as aforesaid) no liability to any such Person will attach to the Calculation Agent in connection with the exercise or non-exercise by it of its powers, duties and discretions for such purposes.
(i) Benchmark Replacement:
Notwithstanding the provisions in this Condition 7, if the Issuer or Calculation Agent determines that a Benchmark Event has occurred in relation to an Original Reference Rate when any Rate of Interest (or any component part thereof) remains to be determined by reference to such Original Reference Rate, then the following provisions shall apply to the relevant Series of Notes:
(i) the Issuer shall use reasonable endeavours to appoint an Independent Adviser, as soon as reasonably practicable, to determine a Successor Reference Rate, failing which an Alternative Reference Rate, and in each case an Adjustment Spread (if any) (in any such case, acting in good faith and in a commercially reasonable manner) no later than five Business Days prior to the Interest Determination Date relating to the next Interest Period (the “IA Determination Cut-off Date”), for the purposes of determining the Rate of Interest applicable to the Notes for such next Interest Period and for all other future Interest Periods (subject to the subsequent operation of this Condition 7(i) during any other future Interest Period(s)).
(ii) if the Independent Adviser is unable to determine an Alternative Reference Rate (as applicable) prior to the relevant IA Determination Cut-off Date, the Issuer (acting in good faith and in a commercially reasonable manner) may determine an Alternative Reference Rate and an Adjustment Spread (if any) no later than three Business Days prior to the Interest Determination Date relating to the next Interest Period (the “Issuer Determination Cut-off Date”), for the purposes of determining the Rate of Interest applicable to the Notes for such next Interest Period and for all other future Interest Periods (subject to the subsequent operation of this Condition 7(i) during any other future Interest Period(s)). Without prejudice to the definitions thereof, for the purposes of determining any Alternative Reference Rate and/or any Adjustment Spread, the Issuer will take into account any relevant and applicable market precedents as well as any published guidance from relevant associations involved in the establishment of market standards and/or protocols in the international debt capital markets;
(iii) if a Successor Reference Rate or, failing which, an Alternative Reference Rate (as applicable) is determined by the relevant Independent Adviser or the Issuer (as applicable) in accordance with this Condition 7(i):
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(A) such Successor Reference Rate or Alternative Reference Rate (as applicable) shall replace the Original Reference Rate for all future Interest Periods (subject to the subsequent operation of, and adjustment as provided in, this Condition 7(i));
(B) if the relevant Independent Adviser or the Issuer (as applicable):
(I) determines that an Adjustment Spread is required to be applied to such Successor Reference Rate or Alternative Reference Rate (as applicable) and determines the quantum of, or a formula or methodology for determining, such Adjustment Spread, then such Adjustment Spread shall be applied to such Successor Reference Rate or Alternative Reference Rate (as applicable) for all future Interest Periods (subject to the subsequent operation of, and adjustment as provided in, this Condition 7(i)); or
(II)is unable to determine the quantum of, or a formula or methodology for determining, an Adjustment Spread, then such Successor Reference Rate or Alternative Reference Rate (as applicable) will apply without an Adjustment Spread for all future Interest Periods (subject to the subsequent operation of, and adjustment as provided in, this Condition 7(i)); and
(C) the relevant Independent Adviser or the Issuer (as applicable) (acting in good faith and in a commercially reasonable manner) may in its discretion specify:
(I) changes to these Conditions in order to follow market practice in relation to such Successor Reference Rate or Alternative Reference Rate (as applicable), including, but not limited to (1) any Reference Banks, Additional Business Centre(s), Business Day, Business Day Convention, Day Count Fraction, Interest Determination Date, Relevant Financial Centre and/or Relevant Screen Page (all as defined in the Final Terms) applicable to the Notes and (2) the method for determining the fallback to the Rate of Interest in relation to the Notes if such Successor Reference Rate or Alternative Reference Rate (as applicable) is not available; and
(II) any other changes which the relevant Independent Adviser or the Issuer (as applicable) determines are reasonably necessary to ensure the proper operation and comparability to the Original Reference Rate of such Successor Reference Rate or Alternative Reference Rate (as applicable), which changes shall apply to the Notes for all future Interest Periods (subject to the subsequent operation of this Condition 7(i); and
(iv) promptly following the determination of (i) any Successor Reference Rate or Alternative Reference Rate (as applicable) and (ii) if applicable, any Adjustment Spread, the Issuer shall give notice thereof and of any changes (and the effective date thereof) pursuant to Condition 7(i)(iii)(C) to the Fiscal Paying Agent and, if applicable, the Calculation Agent and the Noteholders in accordance with Condition 18 (Notices).
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No consent of the Noteholders shall be required in connection with effecting the relevant Successor Reference Rate or Alternative Reference Rate (as applicable) as described in this Condition 7(i) or such other relevant changes pursuant to Condition 7(i)(iii)(C), including any changes to these Conditions and the Agency Agreement.
For the avoidance of doubt, if a Successor Reference Rate or an Alternative Reference Rate is not determined pursuant to the operation of this Condition 7(i) prior to the relevant Issuer Determination Cut-off Date, then the Rate of Interest for the next Interest Period shall be determined by reference to the fallback provisions of Condition 7(c).
For the purposes of this Condition 7(i):
“Adjustment Spread” means a spread (which may be positive or negative) or formula or methodology for calculating a spread, in each case to be applied to a Successor Reference Rate or an Alternative Reference Rate (as applicable) as a result of the replacement of the Original Reference Rate with such Successor Reference Rate or Alternative Reference Rate (as applicable) and is the spread, formula or methodology which:
(i) in the case of a Successor Reference Rate, is formally recommended in relation to the replacement of the Reference Rate with such Successor Reference Rate by any Relevant Nominating Body; or
(ii) in the case of a Successor Reference Rate for which no such recommendation has been made or in the case of an Alternative Reference Rate, the relevant Independent Adviser or the Issuer (as applicable) determines is recognised or acknowledged as being in customary market usage in international debt capital markets transactions which reference the Original Reference Rate, where such rate has been replaced by such Successor Reference Rate or Alternative Reference Rate (as applicable); or (if the Independent Adviser determines that no such spread is customarily applied) the Independent Adviser determines is recognised or acknowledged as being the industry standard for over-the-counter derivative transactions which reference the Original Reference Rate, where such rate has been replaced by the Successor Reference Rate or the Alternative Reference Rate (as the case may be).
“Alternative Reference Rate” means an alternative benchmark or screen rate that the relevant Independent Adviser or the Issuer (as applicable) determines is customary in market usage in the international debt capital markets for the purposes of determining floating rates of interest in respect of notes denominated in the Specified Currency and of a comparable duration to the relevant Interest Periods.
“Benchmark Event” means, in respect of a Reference Rate:
(i) the Original Reference Rate ceasing to be published for a period of at least 5 Business Days or ceasing to exist; or
(ii) a public statement by the administrator of the Original Reference Rate that it has ceased or that it will, by a specified date on or prior to the next Interest
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Determination Date, cease publishing the Original Reference Rate permanently or indefinitely (in circumstances where no successor administrator has been appointed that will continue publication of the Original Reference Rate); or
(iii) a public statement by the supervisor of the administrator of the Original Reference Rate, that the Original Reference Rate has been or will, by a specified date on or prior to the next Interest Determination Date, be permanently or indefinitely discontinued; or
(iv) a public statement by the supervisor of the administrator of the Original Reference Rate that the Original Reference Rate is no longer representative of its relevant underlying market; or
(v) a public statement by the supervisor of the administrator of the Original Reference Rate as a consequence of which the Original Reference Rate will be prohibited from being used either generally, or in respect of the Notes, in each case by a specific date on or prior to the next Interest Determination Date; or
(vi) it has become unlawful (including, without limitation, under the EU Benchmark Regulation (Regulation (EU) 2016/1011), as amended from time to time, if applicable) for any Paying Agent, Calculation Agent, the Issuer or other party to calculate any payments due to be made to any Noteholder using the Original Reference Rate.
“Independent Adviser” means an independent financial institution of international repute or other independent financial adviser experienced in the international debt capital markets, in each case appointed by the Issuer.
“Original Reference Rate” means:
(i) the originally-specified benchmark or screen rate (as applicable) used to determine the Rate of Interest (or any component part thereof) on the Notes; or
(ii) any Successor Reference Rate or Alternative Reference Rate which has been determined in relation to such benchmark or screen rate (as applicable) pursuant to the operation of this Condition 7(i).
“Relevant Nominating Body” means, in respect of a reference rate:
(i) the central bank for the currency to which such reference rate relates, or any central bank or other supervisory authority which is responsible for supervising the administrator of such reference rate; or
(ii) any working group or committee sponsored by, chaired or co-chaired by or constituted at the request of (a) the central bank for the currency to which such reference rate relates, (b) any central bank or other supervisory authority which is responsible for supervising the administrator of such reference rate, (c) a group of the aforementioned central banks or other supervisory authorities, or (d) the Financial Stability Board or any part thereof.
“Successor Reference Rate” means a successor to or replacement of the Original Reference Rate which is formally recommended by any Relevant Nominating Body.
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8. Zero Coupon Note Provisions
(a) Application: This Condition 8 (Zero Coupon Note Provisions) is applicable to the Notes only if the Zero Coupon Note Provisions are specified in the relevant Final Terms as being applicable.
(b) Late payment on Zero Coupon Notes: If the Redemption Amount payable in respect of any Zero Coupon Note is improperly withheld or refused, the Redemption Amount shall thereafter be an amount equal to the sum of:
(i) the Reference Price; and
(ii) the product of the Accrual Yield (compounded annually) being applied to the Reference Price on the basis of the relevant Day Count Fraction from (and including) the Issue Date to (but excluding) whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (ii) the day which is five days after the Fiscal Agent has notified the Noteholders that it has received all sums due in respect of the Notes up to such fifth day (except to the extent that there is any subsequent default in payment).
9. Redemption and Purchase
(a) Scheduled redemption: Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed at their Final Redemption Amount on the Maturity Date, subject as provided in Condition 10 (Payments).
(b) Redemption for tax reasons: The Notes may be redeemed at the option of the Issuer in whole, but not in part:
(i) at any time (if the Floating Rate Note Provisions are specified in the relevant Final Terms as being not applicable, and provided that if either the Floating- Fixed Rate Note Provisions or the Fixed-Floating Rate Note Provisions are specified in the relevant Final Terms as being applicable, such time of redemption does not fall during an Interest Period the Rate of Interest in respect of which is calculated in accordance with the Floating Rate Note Provisions; or
(ii) on any Interest Payment Date (if the Floating Rate Note Provisions are specified in the relevant Final Terms as being applicable),
in each case, on giving not less than 30 nor more than 60 days’ notice to the Noteholders, or such other period(s) as may be specified in the relevant final terms, (which notice shall be irrevocable), at their Early Redemption Amount (Tax), together with interest accrued (if any) to the date fixed for redemption, if:
(A) the Issuer has or will become obliged to pay additional amounts as provided or referred to in Condition 11 (Taxation) as a result of any change in, or amendment to, the laws or regulations of any Relevant Jurisdiction or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official
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interpretation of such laws or regulations (including a holding by a court of competent jurisdiction), which change or amendment becomes effective on or after the date on which the agreement is reached to issue the first Tranche of the Notes; and
(B) such obligation cannot be avoided by the Issuer taking reasonable measures available to it,
provided, however, that no such notice of redemption shall be given earlier than:
(1) where the Notes may be redeemed at any time, 90 days (or such other period as may be specified in the relevant final terms) prior to the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment in respect of the Notes were then due; or
(2) where the Notes may be redeemed only on an Interest Payment Date, 60 days (or such other period as may be specified in the relevant final terms) prior to the Interest Payment Date occurring immediately before the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment in respect of the Notes were then due.
Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the Fiscal Agent (A) a certificate signed by two directors of the Issuer stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred of and (B) an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such additional amounts as a result of such change or amendment. Upon the expiry of any such notice as is referred to in this Condition 9(b), the Issuer shall be bound to redeem the Notes in accordance with this Condition 9(b).
(c) Redemption at the option of the Issuer: If the Call Option is specified in the relevant Final Terms as being applicable, the Notes may be redeemed at the option of the Issuer in whole or, if so specified in the relevant Final Terms, in part on any Optional Redemption Date (Call) at the relevant Optional Redemption Amount (Call) on the Issuer’s giving not less than 30 nor more than 60 days’ notice to the Noteholders, or such other period(s) as may be specified in the relevant Final Terms (which notice shall be irrevocable and shall oblige the Issuer to redeem the Notes or, as the case may be, the Notes specified in such notice on the relevant Optional Redemption Date (Call) at the Optional Redemption Amount (Call) plus accrued interest (if any) to, but excluding, the Optional Redemption Date (Call)). Any notice so given shall oblige the Issuer to redeem the Notes on the Optional Redemption Date (Call) accordingly.
(d) Partial redemption: If the Notes are to be redeemed in part only on any date in accordance with Condition 9(c) (Redemption at the option of the Issuer), the Notes to be redeemed shall be selected by the drawing of lots in such place as the Fiscal Agent
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approves and in such manner as the Fiscal Agent considers appropriate, subject to compliance with applicable law, the rules of each competent authority, stock exchange and/or quotation system (if any) by which the Notes have then been admitted to listing, trading and/or quotation and the notice to Noteholders referred to in Condition 9(c) (Redemption at the option of the Issuer) shall specify the serial numbers of the Notes so to be redeemed. If any Maximum Redemption Amount or Minimum Redemption Amount is specified in the relevant Final Terms, then the Optional Redemption Amount (Call) shall in no event be greater than the maximum or be less than the minimum so specified.
(e) Clean-Up Call Option: If the Clean-up Call Option (defined herein) is specified in the relevant Final Terms as being applicable, in the event that at least 80 per cent. of the initial aggregate principal amount of the Notes has been purchased and cancelled by the Issuer, the Issuer may, at its option (the "Clean-Up Call Option") but subject to having given not less than thirty (30) nor more than sixty (60) days’ notice to the Noteholders, redeem all, but not some only, of the outstanding Notes. Any such redemption shall be at par together, if appropriate, with any interest accrued to the date fixed for redemption.
(f) Redemption at the option of Noteholders: If the Put Option is specified in the relevant Final Terms as being applicable, the Issuer shall, at the option of the holder of any Note redeem such Note on the Optional Redemption Date (Put) specified in the relevant Put Option Notice at the relevant Optional Redemption Amount (Put) together with interest (if any) accrued to such date. In order to exercise the option contained in this Condition 9(f), the holder of a Note must, not less than 30 nor more than 60 days before the relevant Optional Redemption Date (Put) (or such other period(s) as may be specified in the relevant final terms), deposit with any Paying Agent such Note together with all unmatured Coupons relating thereto and a duly completed Put Option Notice in the form obtainable from any Paying Agent. The Paying Agent with which a Note is so deposited shall deliver a duly completed Put Option Receipt to the depositing Noteholder. No Note, once deposited with a duly completed Put Option Notice in accordance with this Condition 9(f), may be withdrawn; provided, however, that if, prior to the relevant Optional Redemption Date (Put), any such Note becomes immediately due and payable or, upon due presentation of any such Note on the relevant Optional Redemption Date (Put), payment of the redemption moneys is improperly withheld or refused, the relevant Paying Agent shall mail notification thereof to the depositing Noteholder at such address as may have been given by such Noteholder in the relevant Put Option Notice and shall hold such Note at its Specified Office for collection by the depositing Noteholder against surrender of the relevant Put Option Receipt. For so long as any outstanding Note is held by a Paying Agent in accordance with this Condition 9(f), the depositor of such Note and not such Paying Agent shall be deemed to be the holder of such Note for all purposes.
(g) Redemption at the option of Noteholders upon a Change of Control Put Event: If at any time while the Notes remain outstanding a Change of Control Put Event occurs, the holder of any Note will have the option (unless, prior to the giving of the Change of Control Put Notice referred to below, the Issuer gives notice to redeem the Notes in accordance with Condition 9(b) (Redemption for tax reasons) or, if applicable, Condition 9(c) (Redemption at the option of the Issuer)) to require the Issuer to redeem such Note on the Change of Control Put Date at its Change of Control Redemption
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Amount together with interest accrued to, but excluding, the Change of Control Put Date.
If a Change of Control Put Event occurs, the Issuer shall, within 14 days of the occurrence of such Change of Control Put Event, give notice (a "Change of Control Notice") to the Noteholders in accordance with Condition 18 (Notices) specifying the nature of the Change of Control and the procedure for exercising the option contained in this Condition 9(g).
To exercise the right to require redemption of this Note, the holder of this Note must deliver this Note at the specified office of any Paying Agent at any time during the normal business hours of such Paying Agent falling within the period (the "Change of Control Put Period") of 45 days after that on which a Change of Control Notice is given, accompanied by a duly completed and signed notice of exercise in the form (for the time being current) obtainable from any specified office of any Paying Agent (a "Change of Control Put Notice") and in which the holder must specify a bank account to which payment is to be made under this Condition. All unmatured coupons shall be dealt with in accordance with the provisions of Condition 10 (Payments). The Paying Agent to which such Note and Change of Control Put Notice are delivered will issue to the holder concerned a non transferable receipt (a "Change of Control Put Receipt") in respect of the Note so delivered. The Issuer shall redeem the Notes in respect of which Change of Control Put Receipt have been issued on the date (the "Change of Control Put Date") being the tenth day after the date of expiry of the Change of Control Put Period, provided, however, that if, prior to the Change of Control Put Date, any such Note becomes immediately due and payable or, upon due presentation of any such Note on the Change of Control Put Date, payment of the redemption moneys is improperly withheld or refused, the relevant Paying Agent shall mail notification thereof to the depositing Noteholder at such address as may have been given by such Noteholder in the relevant Change of Control Put Notice and shall hold such Note at its specified office for collection by the depositing Noteholder against surrender of the relevant Change of Control Put Receipt. For so long as any outstanding Note is held by a Paying Agent in accordance with this Condition 9(g), the depositor of such Note and not such Paying Agent shall be deemed to be the holder of such Note for all purposes. Payment in respect of any Note will be made on the Change of Control Put Date by transfer to the bank account (if any) specified in the Change of Control Put Notice and, in every other case on or after the Change of Control Put Date, in each case against presentation and surrender or (as the case may be) endorsement of such Change of Control Put Receipt at the specified office of any Paying Agent in accordance with the provisions of this Condition 9(g).
(h) No other redemption: The Issuer shall not be entitled to redeem the Notes otherwise than as provided in paragraphs (a) to (g) above.
(i) Early redemption of Zero Coupon Notes: Unless otherwise specified in the relevant Final Terms, the Redemption Amount payable on redemption of a Zero Coupon Note at any time before the Maturity Date shall be an amount equal to the sum of:
(i) the Reference Price; and
(ii) the product of the Accrual Yield (compounded annually) being applied to the Reference Price from (and including) the Issue Date to (but excluding) the date
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fixed for redemption or (as the case may be) the date upon which the Note becomes due and payable.
Where such calculation is to be made for a period which is not a whole number of years, the calculation in respect of the period of less than a full year shall be made on the basis of such Day Count Fraction as may be specified in the Final Terms for the purposes of this Condition 9(i) or, if none is so specified, a Day Count Fraction of 30E/360.
(j) Purchase: The Issuer and any of its Subsidiaries may at any time purchase Notes in the open market or otherwise and at any price (provided that they are purchased together with all unmatured Coupons relating to them).
(k) Cancellation: All Notes redeemed pursuant to the Conditions and any unmatured Coupons attached to or surrendered with them will be cancelled and may not be re- issued or resold. All Notes purchased in accordance with Condition 9(j) (Purchase) and any unmatured Coupons attached to or surrendered with them may be held, re-issued, resold or, at the option of the Issuer, surrendered to any Paying Agent for cancellation.
10. Payments
(a) Principal: Payments of principal shall be made only against presentation and (provided that payment is made in full) surrender of Notes at the Specified Office of any Paying Agent outside the United States by cheque drawn in the currency in which the payment is due on, or by transfer to an account denominated in that currency (or, if that currency is euro, any other account to which euro may be credited or transferred) and maintained by the payee with, a bank in the Principal Financial Centre of that currency.
(b) Interest: Payments of interest shall, subject to paragraph (h) below, be made only against presentation and (provided that payment is made in full) surrender of the appropriate Coupons at the Specified Office of any Paying Agent outside the United States in the manner described in paragraph (a) above.
(c) Payments in New York City: Payments of principal or interest may be made at the Specified Office of a Paying Agent in New York City if (i) the Issuer has appointed Paying Agents outside the United States with the reasonable expectation that such Paying Agents will be able to make payment of the full amount of the interest on the Notes in the currency in which the payment is due when due, (ii) payment of the full amount of such interest at the offices of all such Paying Agents is illegal or effectively precluded by exchange controls or other similar restrictions and (iii) payment is permitted by applicable United States law.
(d) Payments subject to fiscal laws: All payments in respect of the Notes are subject in all cases to (i) any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 11 (Taxation) and (ii) any withholding or deduction required pursuant to an agreement described in Section 1471(b) of the U.S. Internal Revenue Code of 1986 (the "Code") or otherwise imposed pursuant to Sections 1471 through 1474 of the Code, any regulations or agreements thereunder, any official interpretations thereof, or (without prejudice to the provisions of Condition 11 (Taxation)) any law implementing an intergovernmental approach thereto. No commissions or expenses shall be charged to the Noteholders or Couponholders in respect of such payments.
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(e) Deductions for unmatured Coupons: If the relevant Final Terms specifies that the Fixed Rate Note Provisions are applicable and a Note is presented without all unmatured Coupons relating thereto:
(i) if the aggregate amount of the missing Coupons is less than or equal to the amount of principal due for payment, a sum equal to the aggregate amount of the missing Coupons will be deducted from the amount of principal due for payment; provided, however, that if the gross amount available for payment is less than the amount of principal due for payment, the sum deducted will be that proportion of the aggregate amount of such missing Coupons which the gross amount actually available for payment bears to the amount of principal due for payment;
(ii) if the aggregate amount of the missing Coupons is greater than the amount of principal due for payment:
(A) so many of such missing Coupons shall become void (in inverse order of maturity) as will result in the aggregate amount of the remainder of such missing Coupons (the "Relevant Coupons") being equal to the amount of principal due for payment; provided, however, that where this sub-paragraph would otherwise require a fraction of a missing Coupon to become void, such missing Coupon shall become void in its entirety; and
(B) a sum equal to the aggregate amount of the Relevant Coupons (or, if less, the amount of principal due for payment) will be deducted from the amount of principal due for payment; provided, however, that, if the gross amount available for payment is less than the amount of principal due for payment, the sum deducted will be that proportion of the aggregate amount of the Relevant Coupons (or, as the case may be, the amount of principal due for payment) which the gross amount actually available for payment bears to the amount of principal due for payment.
Each sum of principal so deducted shall be paid in the manner provided in paragraph (a) above against presentation and (provided that payment is made in full) surrender of the relevant missing Coupons.
(f) Unmatured Coupons void: If the relevant Final Terms specifies that this Condition 10(f) is applicable or that the Floating Rate Note Provisions are applicable, on the due date for final redemption of any Note or early redemption in whole of such Note pursuant to Condition 9(b) (Redemption for tax reasons), Condition 9(c) (Redemption at the option of the Issuer), Condition 9(f) (Redemption at the option of Noteholders), Condition 9(g) (Redemption at the option of the Noteholders upon a Change of Control Put Event) or Condition 12 (Events of Default), all unmatured Coupons relating thereto (whether or not still attached) shall become void and no payment will be made in respect thereof.
(g) Payments on business days: If the due date for payment of any amount in respect of any Note or Coupon is not a Payment Business Day in the place of presentation, the holder shall not be entitled to payment in such place of the amount due until the next succeeding Payment Business Day in such place and shall not be entitled to any further interest or other payment in respect of any such delay.
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(h) Payments other than in respect of matured Coupons: Payments of interest other than in respect of matured Coupons shall be made only against presentation of the relevant Notes at the Specified Office of any Paying Agent outside the United States (or in New York City if permitted by paragraph (c) above).
(i) Partial payments: If a Paying Agent makes a partial payment in respect of any Note or Coupon presented to it for payment, such Paying Agent will endorse thereon a statement indicating the amount and date of such payment.
(j) Exchange of Talons: On or after the maturity date of the final Coupon which is (or was at the time of issue) part of a Coupon Sheet relating to the Notes, the Talon forming part of such Coupon Sheet may be exchanged at the Specified Office of the Fiscal Agent for a further Coupon Sheet (including, if appropriate, a further Talon but excluding any Coupons in respect of which claims have already become void pursuant to Condition 13 (Prescription). Upon the due date for redemption of any Note, any unexchanged Talon relating to such Note shall become void and no Coupon will be delivered in respect of such Talon.
11. Taxation
(a) Gross up:
All payments of principal and interest by or on behalf of the Issuer in respect of the Notes and the Coupons shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed, levied, collected, withheld or assessed by or within any Relevant Jurisdiction, unless such withholding or deduction is required by law. In the event that any such withholding or deduction is imposed, levied, collected, withheld or assessed by or within any Relevant Jurisdiction, the Issuer shall pay such additional amounts as will result in receipt by the Noteholders and the Couponholders of such amounts as would have been received by them had no such withholding or deduction been required, except that no such additional amounts shall be payable:
(i) in the case of any Note and/or Coupon presented for payment by or on behalf of a holder who is liable to such Taxes in respect of such Note or Coupon by reason of his having some connection with the Relevant Jurisdiction other than the mere holding of the Note or Coupon; or
(ii) if such Note or Coupon is presented for payment more than 30 days after the Relevant Date except to the extent that the holder of it would have been entitled to such additional amounts on presenting such Note or Coupon for payment on the last day of such period of 30 days; or
(iii) in the case of a Note and/or Coupon presented for payment in the Republic of Italy; or
(iv) in the case of a Note and/or Coupon presented for payment by or on behalf of a holder who would not be liable or subject to the withholding or deduction by making a declaration of non-residence or other similar claim for exemption to the relevant tax authority; or
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(v) where such withholding or deduction is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive, law or agreement implementing or complying with, or introduced in order to conform to, such Directive; or
(vi) in the case of any Note and/or Coupon presented for payment by or on behalf of a Noteholder or a Couponholder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the European Union; or
(vii) in relation to any payment or deduction of any interest, principal or other proceeds of any Note or Coupon on account of imposta sostitutiva pursuant to Italian Legislative Decree No. 239 of 1st April 1996 ("Decree No. 239") and any related implementing regulations (as the same may be amended or supplemented at the date of issue of the Notes); or
(viii) in the event of payment to a non-Italian resident legal entity or a non-Italian resident individual, to the extent that interest or other amounts are paid to a non- Italian resident legal entity or a non-Italian resident individual which is resident in a country which does not allow for a satisfactory exchange of information with the Italian authorities (the states allowing for an adequate exchange of information with the Republic of Italy are those listed in Ministerial Decree of 4 September 1996, as amended and supplemented).
12. Events of Default
If any of the following events occurs:
(a) Non-payment: the Issuer (1) fails to pay any amount of principal in respect of the Notes when due and such failure continues for a period of seven days, or (2) fails to pay any amount of interest in respect of the Notes when due and such failure continues for a period of 14 days; or
(b) Breach of other obligations: without prejudice to Condition 12(a), the Issuer does not perform or comply with any one or more of its other obligations in the Notes which default is incapable of remedy or is not remedied within 30 days after notice of such default shall have been given to the Fiscal Agent at its specified office by any Noteholder; or
(c) Cross-default of Issuer or Subsidiary:
(i) any other Indebtedness for Borrowed Money (other than Project Finance Indebtedness) of the Issuer or any of its Material Subsidiaries becomes due and payable prior to its stated maturity by reason of any actual or potential default, event of default or the like (howsoever described), or
(ii) any such Indebtedness for Borrowed Money (other than Project Finance Indebtedness) is not paid when due or, as the case may be, within any applicable grace period, or
(iii) the Issuer or any of its Material Subsidiaries fails to pay when due any amount payable by it under any present or future guarantee for, or indemnity in respect
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of, any Indebtedness for Borrowed Money (other than Project Finance Indebtedness),
provided that the aggregate amount of the Indebtedness for Borrowed Money, guarantees and/or indemnities in respect of which one or more of the events mentioned in this Condition 12(c) have occurred (in the case of (iii) taking into account only the amount which the relevant person has failed to pay) equals or exceeds €30,000,000 or its equivalent in any other currency (on the basis of the middle spot rate for the relevant currency against euro as quoted by any leading bank on the day on which this Condition operates); or
(d) Enforcement: a distress, attachment, execution or other legal process is levied, enforced or sued out on or against all or a substantial part of the property, assets or revenues of the Issuer or any of its Material Subsidiaries and is not discharged or stayed within 45 days; or
(e) Security enforced: any mortgage, charge, pledge, lien or other encumbrance, created or assumed by the Issuer or any of its Material Subsidiaries in respect of all or a substantial part of the property, assets or revenues of the Issuer becomes enforceable and any step is taken to enforce it (including the taking of possession or the appointment of a receiver, manager or other similar person); or
(f) Insolvency etc: the Issuer or any of its Material Subsidiaries is (or is, or could be, deemed by law or a court to be) insolvent or bankrupt or unable to pay its debts, stops, suspends or threatens to stop or suspend payment of all or a material part of its debts, proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any of such debts or a moratorium is agreed or declared in respect of or affecting all or a material part of the debts of the Issuer or any of its Material Subsidiaries; or
(g) Winding up etc: an order is made or an effective resolution passed for the winding-up or dissolution of the Issuer or any of its Material Subsidiaries, or the Issuer ceases or threatens to cease to carry on all or substantially all of its business or operations, except for the purpose of and followed by (A) a reconstruction, amalgamation, reorganisation, merger, demerger or consolidation (i) on terms approved by a resolution of the Noteholders, or (ii) in the case of a Material Subsidiary, whereby all or substantially all of the undertaking and assets of the Material Subsidiary are transferred, sold, contributed, assigned to or otherwise vested in the Issuer or another of its Material Subsidiaries, or (B) a Permitted Reorganisation; or
(h) Analogous event: any event occurs which under the laws of any relevant jurisdiction has an analogous effect to any of the events referred to in the paragraphs above.
Then any Note may, by notice in writing given to the Fiscal Agent at its specified office by the holder, be declared immediately due and payable whereupon it shall become immediately due and payable at its principal amount together with accrued interest without further formality unless such event of default shall have been remedied prior to the receipt of such notice by the Fiscal Agent.
13. Prescription
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Claims for principal shall become void unless the relevant Notes are presented for payment within ten years of the appropriate Relevant Date. Claims for interest shall become void unless the relevant Coupons are presented for payment within five years of the appropriate Relevant Date.
14. Replacement of Notes and Coupons
If any Note or Coupon is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the Specified Office of the Fiscal Agent (and, if the Notes are then admitted to listing, trading and/or quotation by any competent authority, stock exchange and/or quotation system which requires the appointment of a Paying Agent in any particular place, the Paying Agent having its Specified Office in the place required by such competent authority, stock exchange and/or quotation system), subject to all applicable laws and competent authority, stock exchange and/or quotation system requirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued.
15. Agents
In acting under the Agency Agreement and in connection with the Notes and the Coupons, the Paying Agents act solely as agents of the Issuer and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders or Couponholders.
The initial Paying Agents and their initial Specified Offices are listed below. The initial Calculation Agent (if any) is specified in the relevant Final Terms. The Issuer reserves the right at any time to vary or terminate the appointment of any Paying Agent and to appoint a successor fiscal agent or Calculation Agent and additional or successor paying agents; provided, however, that:
(a) the Issuer shall at all times maintain a Fiscal Agent; and
(b) the Issuer shall at all times maintain a paying agent in an EU member state that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC; and
(c) if a Calculation Agent is specified in the relevant Final Terms, the Issuer shall at all times maintain a Calculation Agent; and
(d) if and for so long as the Notes are admitted to listing, trading and/or quotation by any competent authority, stock exchange and/or quotation system which requires the appointment of a Paying Agent in any particular place, the Issuer shall maintain a Paying Agent having its Specified Office in the place required by such competent authority, stock exchange and/or quotation system.
Notice of any change in any of the Paying Agents or in their Specified Offices shall promptly be given to the Noteholders.
16. Meetings of Noteholders; Noteholders’ Representative; Modification and Waiver
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(a) Meetings of Noteholders: the Fiscal Agency Agreement contains provisions for convening meetings of Noteholders to consider matters relating to the Notes, including the modification of any provision of these Conditions. Any such modification may be made if sanctioned by an Extraordinary Resolution.
In relation to the convening of meetings, quorums and the majorities required to pass an Extraordinary Resolution, the following provisions shall apply in respect of the Notes but are subject to compliance with mandatory laws, legislation, rules and regulations of Italy in force from time to time and, where applicable Italian law so requires, the Issuer’s by laws:
(i) a meeting of Noteholders may be convened by the Issuer and/or the Noteholders’ Representative (as defined below) and shall be convened by either of them upon the request in writing of Noteholders holding not less than one twentieth of the aggregate principal amount of the outstanding Notes;
(ii) a meeting of Noteholders will be validly held (subject to any mandatory laws, legislation, rules and regulations of Italian law, as well as the Issuer’s by-laws, in force from time to time) if: (a) in respect of a meeting convened to pass a resolution relating to a Reserved Matter, there are one or more persons present being or representing Noteholders holding at least one-half of the aggregate principal amount of the outstanding Notes; or (b) in respect of a meeting convened to pass a resolution that does not relate to a Reserved Matter, (i) in the case of a sole meeting (convocazione unica), there are one or more persons being or representing Noteholders holding at least one-fifth of the aggregate principal amount of the outstanding Notes, (ii) in the case of a first meeting (prima convocazione), there are one or more persons present being or representing Noteholders holding at least one-half of the aggregate principal amount of the outstanding Notes, (iii) in the case of a second meeting (seconda convocazione), there are one or more persons present being or representing Noteholders holding more than one-third of the aggregate principal amount of the outstanding Notes or (iv) in the case of any subsequent adjourned meeting (convocazioni successive), there are one or more persons present being or representing Noteholders holding at least one-fifth of the aggregate principal amount of the outstanding Notes; provided that the Issuer’s by-laws may in each case (to the extent permitted under the applicable laws and regulations of the Republic of Italy) provide for a higher quorum; and
(iii) the majority required to pass an Extraordinary Resolution at any meeting (including any adjourned meeting) convened to vote on any resolution will be (a) for voting on any matter other than a Reserved Matter, one or more persons holding or representing at least two-thirds of the aggregate principal amount of the outstanding Notes represented at the meeting or (b) for voting on a Reserved Matter, the higher of (i) one or more persons holding or representing not less than one half of the aggregate principal amount of the outstanding Notes, and (ii) one or more persons holding or representing not less than two thirds of the Notes represented at the meeting, provided that, to the extent permitted under applicable provisions of Italian law, the Issuer’s by-laws may in each case provide for higher majorities. Any resolution duly passed at any such meeting shall be binding on all the Noteholders, whether or not they are present at the meeting and on all Couponholders.
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(b) Noteholders’ Representative: a representative of the Noteholders (rappresentante comune) (the "Noteholders’ Representative"), subject to applicable provisions of Italian law, may be appointed pursuant to Article 2417 of the Italian Civil Code in order to represent the Noteholders’ interests under these Conditions and to give effect to resolutions passed at a meeting of the Noteholders. If the Noteholders’ Representative is not appointed by a resolution of such Noteholders, the Noteholders’ Representative shall be appointed by a decree of the court where the Issuer has its registered office at the request of one or more Noteholders or at the request of the directors of the Issuer. The Noteholders’ Representative shall remain appointed for a maximum period of three years but may be reappointed again thereafter.
(c) Modification: the parties to the Agency Agreement may agree, without the consent of the Noteholders or the Couponholders, to (i) any modification of any provision of the Agency Agreement which is of a formal, minor or technical nature or is made to correct a manifest error and (ii) any other modification, and any waiver or authorisation of any breach or proposed breach, of any provision of the Agency Agreement which in the opinion of the Issuer is not materially prejudicial to the interests of the Noteholders or the Couponholders. These Conditions may be amended by the parties to the Agency Agreement, without the consent of the Noteholders or Couponholders, to correct a manifest error.
17. Further Issues
The Issuer may from time to time, without the consent of the Noteholders or the Couponholders, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes.
18. Notices
Without prejudice to any further formalities and other requirements set out under any applicable Italian laws and regulations (including Article 125-bis of Legislative Decree No. 58 of 24 February 1998, as amended), notices to the Noteholders shall be valid if published in a leading English language daily newspaper published in London (which is expected to be the Financial Times) and, if the Notes are admitted to trading on the Luxembourg Stock Exchange and it is a requirement of applicable law or regulations, a leading newspaper having general circulation in Luxembourg (which is expected to be Luxemburger Wort) or published on the website of the Luxembourg Stock Exchange (www.bourse.lu) or in either case, if such publication is not practicable, in a leading English language daily newspaper having general circulation in Europe. Any such notice shall be deemed to have been given on the date of first publication (or if required to be published in more than one newspaper, on the first date on which publication shall have been made in all the required newspapers). Couponholders shall be deemed for all purposes to have notice of the contents of any notice given to the Noteholders.
19. Currency Indemnity
If any sum due from the Issuer in respect of the Notes or the Coupons or any order or judgment given or made in relation thereto has to be converted from the currency (the "first currency") in which the same is payable under these Conditions or such order or judgment into another currency (the "second currency") for the purpose of (a) making
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or filing a claim or proof against the Issuer, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation to the Notes, the Issuer shall indemnify each Noteholder, on the written demand of such Noteholder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, against any loss suffered as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (ii) the rate or rates of exchange at which such Noteholder may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof.
This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a separate and independent cause of action.
20. Rounding
For the purposes of any calculations referred to in these Conditions (unless otherwise specified in these Conditions or the relevant Final Terms), (a) all percentages resulting from such calculations will be rounded, if necessary, to the nearest one hundred- thousandth of a percentage point (with 0.000005 per cent. being rounded up to 0.00001 per cent.), (b) all United States dollar amounts used in or resulting from such calculations will be rounded to the nearest cent (with one half cent being rounded up), (c) all Japanese Yen amounts used in or resulting from such calculations will be rounded downwards to the next lower whole Japanese Yen amount, and (d) all amounts denominated in any other currency used in or resulting from such calculations will be rounded to the nearest two decimal places in such currency, with 0.005 being rounded upwards.
21. Governing Law and Jurisdiction
(a) Governing law: The Notes and any non-contractual obligations arising out of or in connection with the Notes are governed by English law. Conditions 16(a) and 16(b) are subject to compliance with mandatory provisions of Italian law.
(b) English courts: The courts of England have exclusive jurisdiction to settle any dispute (a "Dispute") arising out of or in connection with the Notes (including any non- contractual obligation arising out of or in connection with the Notes ).
(c) Appropriate forum: The Issuer agrees that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary.
(d) Rights of the Noteholders to take proceedings outside England: Condition 21(b) (English courts) is for the benefit of the Noteholders only. As a result, nothing in this Condition 21 (Governing law and jurisdiction) prevents any Noteholder from taking proceedings relating to a Dispute ("Proceedings") in any other courts with jurisdiction. To the extent allowed by law, Noteholders may take concurrent Proceedings in any number of jurisdictions.
(e) Process agent: The Issuer agrees that the documents which start any Proceedings and any other documents required to be served in relation to those Proceedings may be
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served on it by being delivered to Law Debenture Corporate Services Limited at Fifth Floor, 100 Wood Street, London EC2V 7EX or at any address of the Issuer in Great Britain at which process may be served on it in accordance with Parts 34 and 37 of the Companies Act 2006. If such person is not or ceases to be effectively appointed to accept service of process on behalf of the Issuer, the Issuer shall, on the written demand of any Noteholder addressed and delivered to the Issuer or to the Specified Office of the Fiscal Agent appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, any Noteholder shall be entitled to appoint such a person by written notice addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent. Nothing in this paragraph shall affect the right of any Noteholder to serve process in any other manner permitted by law. This Condition applies to Proceedings in England and to Proceedings elsewhere.
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FORM OF FINAL TERMS
[PROHIBITION OF SALES TO EEA OR UK RETAIL INVESTORS – The Notes are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the European Economic Area ("EEA") or in the United Kingdom (“UK”). For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”) or (ii) a customer within the meaning of Directive (EU) 2016/97 (as amended, the “Insurance Distribution Directive”), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II. Consequently no key information document required by Regulation (EU) No. 1286/2014 (as amended the “PRIIPs Regulation”) for offering or selling the Notes or otherwise making them available to retail investors in the EEA or in the UK has been prepared and therefore offering or selling the Notes or otherwise making them available to any retail investor in the EEA or in the UK may be unlawful under the PRIIPs Regulation.]
[MiFID II product governance / Professional investors and ECPs only target market] – Solely for the purposes of [the/each] manufacturer’s product approval process, the target market assessment in respect of the Notes has led to the conclusion that: (i) the target market for the Notes is eligible counterparties and professional clients only, each as defined in Directive 2014/65/EU (as amended, “MiFID II”); and (ii) all channels for distribution of the Notes to eligible counterparties and professional clients are appropriate. [Consider any negative target market]. Any person subsequently offering, selling or recommending the Notes (a "distributor") should take into consideration the manufacturer[’s/s’] target market assessment; however, a distributor subject to MiFID II is responsible for undertaking its own target market assessment in respect of the Notes (by either adopting or refining the manufacturer[’s/s’] target market assessment) and determining appropriate distribution channels.]
[Singapore Securities and Futures Act Product Classification – Solely for the purposes of its obligations pursuant to sections 309B(1)(a) and 309B(1)(c) of the Securities and Futures Act (Chapter 289 of Singapore) (the "SFA"), the Issuer has determined, and hereby notifies all relevant persons (as defined in Section 309A of the SFA) that the Notes are ["prescribed capital markets products"]/[capital markets products other than "prescribed capital markets products"] (as defined in the Securities and Futures (Capital Markets Products) Regulations 2018).]
Final Terms dated [●]
Acea S.p.A.
Legal Entity Identifier (LEI): 549300Q3448N041CTH56
Issue of [Aggregate Nominal Amount of Tranche] [Title of Notes]
under the €[●]
Euro Medium Term Note Programme
PART A – CONTRACTUAL TERMS
[Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the "Conditions") set forth in the base prospectus dated 24 July 2020 [and the supplement[s] to the base prospectus[es] dated [●] [●][and [●] [●]]] [which [together] constitute[s] a base
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prospectus (the "Base Prospectus") for the purposes of Regulation (EU) 2017/1129 (the “Prospectus Regulation”)]. This document constitutes the Final Terms of the Notes described herein [for the purposes of Article 8 of the Prospectus Regulation] and must be read in conjunction with the Base Prospectus [as so supplemented].
Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Base Prospectus. The Base Prospectus and the Final Terms are available for viewing at the Issuer’s website (www.acea.it) and will also be published on the website of the Luxembourg Stock Exchange (www.bourse.lu).
[The following alternative language applies if the first tranche of an issue which is being increased was issued under the 2019 Prospectus]
[Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the "Conditions") set forth in the base prospectus dated 15 July 2019 which are incorporated by reference in the base prospectus dated 24 July 2020. This document constitutes the Final Terms of the Notes described herein for the purposes of Article 8 of the Prospectus Regulation and must be read in conjunction with the base prospectus dated 24 July 2020 and the supplement[s] to the base prospectus[es] dated [●] [●][and [●] [●]], which together constitute a base prospectus for the purposes of the Prospectus Regulation (the "Base Prospectus"), including the Conditions incorporated by reference in the Base Prospectus.
Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the base prospectuses dated 15 July 2019 and 24 July 2020 and the supplement[s] to the base prospectus[es] dated [●] [●][and [●] [●]]. Such base prospectuses, the supplement[s] to the base prospectus[es] dated [●] [●][and [●] [●]] and the Final Terms are available for viewing at the Issuer’s website (www.acea.it) and will also be published on the website of the Luxembourg Stock Exchange (www.bourse.lu).]
[Include whichever of the following apply or specify as "Not Applicable" (N/A). Note that the numbering should remain as set out below, even if "Not Applicable" is indicated for individual paragraphs (in which case the sub-paragraphs of the paragraphs which are not applicable can be deleted). Italics denote guidance for completing the Final Terms.]
1. (i) Series Number: [●]
(ii) Tranche Number: [●]
(iii) Date on which the Notes [Not Applicable/The Notes shall be become fungible: consolidated, form a single series and be interchangeable for trading purposes with the [●] on [[●]/the Issue Date/exchange of the Temporary Global Note for interests in the Permanent Global Note, as referred to in paragraph 25 below [which is expected to occur on or about [●]].]
2. Specified Currency or Currencies: [●]
3. Aggregate Nominal Amount: [●]
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(i) Series: [●]
(ii) Tranche: [●]
4. Issue Price: [●] per cent. of the Aggregate Nominal Amount [plus accrued interest from [●] (insert date, if applicable)]
5. (i) Specified Denominations: [ ] [and integral multiplies of [ ] in excess thereof up to and including [ ]. No Notes in definitive form will be issued with a denomination above [ ].]
(Under current practices of Euroclear and Clearstream, unless paragraph 25 (Form of Notes) below specifies that the Permanent Global Note is to be exchanged for Definitive Notes "in the limited circumstances described in the Permanent Global Note", Notes may only be issued in denominations which are integral multiples of the lowest Specified Denomination and may only be traded in such amounts, whether in global or definitive form.)
(Notes, including Notes denominated in Sterling, in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise constitutes a contravention of section 19 Financial Services and Markets Act 2000 and which have a maturity of less than one year must have a minimum redemption value of £100,000 (or its equivalent in other currencies).)
(ii) Calculation Amount: [●]
(If only one Specified Denomination, insert the Specified Denomination. If more than one Specified Denomination, insert the highest common factor. There must be a common factor in the case of two or more Specified Denominations.)
6. (i) Issue Date: [●]
(ii) Interest Commencement Date: [[●]/Issue Date/Not Applicable]
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7. Maturity Date: [●] [Specify date or (for Floating Rate Notes) Interest Payment Date falling in or nearest to the relevant month and year]
8. Interest Basis: [[●] per cent. Fixed Rate] [EURIBOR/LIBOR]+/– [●] per cent. Floating Rate] [Fixed-Floating Rate] [Floating-Fixed Rate] [Zero Coupon]
(further particulars specified in paragraphs [13/14/15/16/17] below)
9. Redemption/Payment Basis: Subject to any purchase and cancellation or early redemption, the Notes will be redeemed on the Maturity Date at 100 per cent. of their nominal amount.
10. Change of Interest or [[●]/Not Applicable] [Specify the date Redemption/Payment Basis: when any fixed or floating rate change occurs or cross refer to paragraphs 13 (Fixed Rate Note Provisions) and 14 (Floating Rate Note Provisions) below and identify these]
11. Put/Call Options: [Investor Put]
[Change of Control Put]
[Issuer Call]
[Clean-up Call Option]
[(further particulars specified in paragraphs [18/19/20/21] below)]
[Not Applicable]
12. [Date [Board] approval for issuance of [●] [and [●], respectively] Notes] obtained:
PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE
13. Fixed Rate Note Provisions [Applicable/Not Applicable/Applicable for the period starting from [●] [and including] [●] ending on [but excluding] [●]]
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(If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Rate[(s)] of Interest: [●] per cent. per annum payable in arrear on each Interest Payment Date
(ii) Interest Payment Date(s): [●] in each year
(iii) Fixed Coupon Amount[(s)]: [●] per Calculation Amount
(iv) Broken Amount(s): [●] per Calculation Amount, payable on the Interest Payment Date falling [in/on] [●]
(v) Day Count Fraction: [Actual/Actual (ICMA) / Actual/Actual (ISDA) / Actual/365 (Fixed) / Actual/360 / 30/360 / 30E/360 / Eurobond Basis / 30E/360 (ISDA)]
14. Floating Rate Note Provisions [Applicable/Not Applicable/Applicable for the period starting from [●] [and including] [●] ending on [but excluding] [●]]
(If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Interest Period(s): [●]
(ii) Specified Period: [●]
(iii) Specified Interest Payment [Not Applicable/[●], subject to adjustment Dates: in accordance with the Business Day Convention set out in sub-paragraph (v) below]
(Note that this item adjusts the end date of each Interest Period (and consequently, also adjusts the length of the Interest Period and the amount of interest due). In relation to the actual date on which Noteholders are entitled to receive payment of interest, see also Condition 10(g) (Payments - Payments on business days) and the defined term "Payment Business Day".)
(iv) [First Interest Payment Date]: [●]
(v) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/ Modified Following Business Day Convention/ Preceding Business Day Convention]
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(vi) Additional Business Centre(s): [Not Applicable/[●]]
(vii) Manner in which the Rate(s) of [Screen Rate Determination/ISDA Interest is/are to be determined: Determination]
(viii) Party responsible for [[●] shall be the Calculation Agent]/[Not calculating the Rate(s) of Applicable] Interest and/or Interest Amount(s) (if not the [Fiscal Agent]):
(ix) Screen Rate Determination: (Conditions 7(c) (Floating Rate Note Provisions – Screen Rate Determination) and 7(d)) (Floating Rate Note Provisions – ISDA Determination))
• Reference Rate: [EURIBOR/LIBOR]
• Reference Banks: [●]/[Not Applicable]
• Interest Determination [●] Date(s): • Relevant Screen Page: [●]
• Relevant Time: [●]
• Relevant Financial [●] Centre:
(x) ISDA Determination: (Condition 7(e) (Floating Rate Note Provisions – Maximum or Minimum Rate of Interest))
• Floating Rate Option: [●]
• Designated Maturity: [●]
• Reset Date: [●]
• [ISDA Definitions: [2000/2006]
(xi) Margin(s): [+/-][●] per cent. per annum
(xii) Minimum Rate of Interest: [[●] per cent. per annum]/[Not Applicable]
(xiii) Maximum Rate of Interest: [[●] per cent. per annum]/[Not Applicable]
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(xiv) Day Count Fraction: [Actual/Actual (ICMA) / Actual/Actual (ISDA) / Actual/365 (Fixed) / Actual/360 / 30/360 / 30E/360 / Eurobond Basis / 30E/360 (ISDA)]
15. Fixed-Floating Rate Note [Applicable/Not Applicable] Provisions: [[●] per cent. Fixed Rate in respect of the Interest Period(s) ending on (but excluding) [●], then calculated in accordance with paragraph 14 (Floating Rate Note Provisions) above.]
16. Floating-Fixed Rate Note [Applicable/Not Applicable] Provisions: [[Floating Rate] in respect of the Interest Period(s) ending on (but excluding) [ ], then calculated in accordance with paragraph 13 (Fixed Rate Note Provisions) above.]
17. Zero Coupon Note Provisions [Applicable/Not Applicable]
(If not applicable, delete the remaining subparagraphs of this paragraph)
(i) Accrual Yield: [●] per cent. per annum
(ii) Reference Price: [●]
(iii) Day Count Fraction: [Actual/Actual (ICMA) / Actual/Actual (ISDA) / Actual/365 (Fixed) / Actual/360 / 30/360 / 30E/360 / Eurobond Basis / 30E/360 (ISDA)]
PROVISIONS RELATING TO REDEMPTION
18. Call Option [Applicable]/[Not Applicable]
(If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Optional Redemption Date(s) [●] (Call):
(ii) Optional Redemption [[●] per Calculation Amount]/[The greater Amount(s) (Call) of each of (i) 100 per cent. of the nominal amount Note: of the Notes and (ii) the Make-Whole Amount]
(iii) If redeemable in part:
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(a) Minimum Redemption [●] per Calculation Amount Amount:
(b) Maximum Redemption [●] per Calculation Amount Amount
(c) Notice period: [●]/[Not Applicable]
(iv) Redemption Margin: [[●] per cent.]/[Not Applicable] (Only applicable to Make- Whole amount)
(v) Reference Bond: [insert applicable reference bond]/[Not (Only applicable to Make- Applicable] Whole amount)
(vi) Reference Dealers: [●]/[Not Applicable] (Only applicable to Make- Whole amount)
19. Put Option [Applicable/Not Applicable]
(If not applicable, delete the remaining sub-paragraphs of this paragraph)
(i) Optional Redemption Date(s): [●]
(ii) Optional Redemption [●] per Calculation Amount Amount(s) of each Note:
(iii) Notice period: [●]/[Not Applicable]
20. Change of Control Put: [Applicable/Not Applicable]
(If not applicable, delete the remaining sub-paragraph of this paragraph)
[(i) Change of Control [●] per Calculation Amount] Redemption Amount(s) of each Note:
21. Clean-up Call Option [Applicable/Not Applicable]
22. Final Redemption Amount of each [●][per Calculation Amount] Note
23. Early Redemption Amount (Tax) [[●] per Calculation Amount]/[Not per Calculation Amount payable on Applicable] redemption for taxation reasons:
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24. Early Termination Amount per [[●] per Calculation Amount]/[Not Calculation Amount payable on Applicable] event of default or other early redemption:
GENERAL PROVISIONS APPLICABLE TO THE NOTES
25. Form of Notes: Bearer Notes:
[Temporary Global Note exchangeable for a Permanent Global Note which is exchangeable for Definitive Notes on [●] days’ notice/at any time/in the limited circumstances specified in the Permanent Global Note]
[Temporary Global Note exchangeable for Definitive Notes on [●] days’ notice]*
[Permanent Global Note exchangeable for Definitive Notes on [●] days’ notice/at any time/in the limited circumstances specified in the Permanent Global Note]
(*Notes may only be issued pursuant to this option in amounts equal to the Specified Denomination or integral multiples thereof)
26. New Global Note: [Yes] [No]
27. Additional Financial Centre(s): [Not Applicable/[●]]
28. Talons for future Coupons to be [Yes/No. As the Notes have more than 27 attached to Definitive Notes (and coupon payments, talons may be required dates on which such Talons mature): if, on exchange into definitive form, more than 27 coupon payments are left.]
Signed on behalf of Acea S.p.A.:
By: ...... Duly authorised
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PART B – OTHER INFORMATION
1. LISTING AND ADMISSION TO TRADING
(i) Listing [Official List of the Luxembourg Stock Exchange/None]
(ii) Admission to trading: [Application [has been/is expected to be] made for the Notes to be admitted to trading on the [regulated market of the Luxembourg Stock Exchange//(specify relevant regulated market)] with effect from [●].]/[Not Applicable.]]1
(Where documenting a fungible issue need to indicate that original securities are already admitted to trading.)
(iii) Estimated total expenses of [●]/[Not Applicable]2 admission to trading:
2. RATINGS [The Notes are not expected to be rated]/[The Notes to be issued [have been/are expected to be] rated]:
[Fitch: [●]]
[Moody’s: [●]]
[[Other]: [●]]
[Need to include a brief explanation of the meaning of the ratings if this has previously been published by the rating provider.]
Option 1 - CRA established in the EEA or in the United Kingdom and registered under the CRA Regulation
[Insert legal name of particular credit rating agency entity providing rating] is established in the EEA or in the United Kingdom and registered under Regulation (EU) No 1060/2009, as amended (the "CRA Regulation").
1 Insert "Not Applicable" where the Notes are not to be admitted to trading. 2 Insert "Not Applicable" where the Notes are not to be admitted to trading.
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Option 2 - CRA established in the EEA or in the United Kingdom , not registered under the CRA Regulation
[Insert legal name of particular credit rating agency entity providing rating] is established in the EEA or in the United Kingdom and is neither registered nor has it applied for registration under Regulation (EU) No 1060/2009, as amended (the "CRA Regulation").
Option 3 - CRA not established in the EEA or in the United Kingdom but relevant rating is endorsed by a CRA which is established and registered under the CRA Regulation
[Insert legal name of particular credit rating agency entity providing rating] is not established in the EEA or in the United Kingdom but the rating it has given to the Notes is endorsed by [insert legal name of credit rating agency], which is established in the EEA or in the United Kingdom and registered under Regulation (EU) No 1060/2009, as amended (the "CRA Regulation").
Option 4 - CRA is not established in the EEA or in the United Kingdom and relevant rating is not endorsed under the CRA Regulation but CRA is certified under the CRA Regulation
[Insert legal name of particular credit rating agency entity providing rating] is not established in the EEA or in the United Kingdom but is certified under Regulation (EU) No 1060/2009, as amended (the "CRA Regulation").
Option 5 - CRA neither established in the EEA or in the United Kingdom nor certified under the CRA Regulation and relevant rating is not endorsed under the CRA Regulation
[Insert legal name of particular credit rating agency entity providing rating] is not established in the EEA or in the
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United Kingdom and is not certified under Regulation (EU) No 1060/2009, as amended (the "CRA Regulation") and the rating it has given to the Notes is not endorsed by a credit rating agency established in the EEA or in the United Kingdom and registered under the CRA Regulation.
3. INTERESTS OF NATURAL AND LEGAL PERSONS INVOLVED IN THE ISSUE/OFFER
(Need to include a description of any interest, including conflicting ones, that is material to the issue/offer, detailing the persons involved and the nature of the interest. May be satisfied by the inclusion of the statement below.)
[Save for any fees payable to the [Managers/Dealers], so far as the Issuer is aware, no person involved in the offer of the Notes has an interest material to the offer.]
[Managers/Dealers] and their affiliates have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with, and may perform other services for, the Issuer and its affiliates in the ordinary course of business. (Amend as appropriate if there are other interests)]
[(When adding any other description, consideration should be given as to whether such matters described constitute "significant new factors" and consequently trigger the need for a supplement to Base Prospectus under Article 23 of the Prospectus Regulation.)]
4. REASONS FOR THE OFFER, ESTIMATED NET PROCEEDS
(i) Reasons for the offer [●] [Not Applicable] (If the Notes are Green Bonds, describe the relevant projects to which the net proceeds of the Tranche of Notes will be applied or make reference to the relevant bond framework to which the net proceeds of the Tranche of Notes will be applied.)
(i) Estimated net proceeds [●] [Not Applicable]
5. YIELD
Indication of yield: [●][Not Applicable]
6. HISTORIC INTEREST RATES
Details of historic [LIBOR/EURIBOR] rates can be obtained from [Reuters] [Not Applicable]
6. BENCHMARK
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EU Benchmarks Regulation: [Applicable: Amounts payable under the Notes are calculated by reference to [EURIBOR] [LIBOR] [insert name[s] of benchmark(s)], which [is/are] provided by [European Money Markets Institute] [ICE Benchmark Administration Limited] [insert name[s] of the administrator[s] – if more than one specify in relation to each relevant benchmark].
(ii) EU Benchmarks Regulation: Article As at the date hereof, [European Money 29(2) statement on benchmarks: Markets Institute] [ICE Benchmark Administration Limited] [Benchmark administrator] [appears] / [does not appear] on the register of administrators and benchmarks established and maintained by the European Securities and Markets Authority pursuant to article 36 of the Benchmarks Regulation (Regulation (EU) 2016/1011 (the "Benchmarks Regulation"). [As far as the Issuer is aware, EITHER [European Money Markets Institute] [ICE Benchmark Administration Limited] [[Benchmark administrator] does not fall within the scope of the Benchmarks Regulation] OR [the transitional provisions in Article 51 of the Benchmarks Regulation apply, such that [European Money Markets Institute] [ICE Benchmark Administration Limited] [Benchmark administrator] is not currently required to obtain authorisation/registration (or, if located outside the European Union, recognition, endorsement or equivalence)].]]
7. [THIRD PARTY INFORMATION
[[ ] has been extracted from [ ]. The Issuer confirms that such information has been accurately reproduced and that, so far as it is aware, and is able to ascertain from information published by [ ], no facts have been omitted which would render the reproduced information inaccurate or misleading.] To the best of the knowledge of the Issuer, having taken all reasonable care to ensure that such is the case, the information contained in these Final Terms is in accordance with the facts and does not omit anything likely to affect the import of such information. [Not Applicable.]
8. OPERATIONAL INFORMATION
ISIN Code: [●]
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Common Code: [●]
[Intended to be held in a manner which [Yes. Note that the designation "yes" would allow Eurosystem eligibility: simply means that the Notes are intended upon issue to be deposited with one of the ICSDs as common safekeeper and does not necessarily mean that the Notes will be recognized as eligible collateral for Eurosystem monetary policy and intra- day credit operations by the Eurosystem either upon issue or at any or all times during their life. Such recognition will depend upon the ECB being satisfied that Eurosystem eligibility criteria have been met.]/
[No. Whilst the designation is specified as "no" at the date of these Final Terms, should the Eurosystem eligibility criteria be amended in the future such that the Notes are capable of meeting them the Notes may then be deposited with one of the ICSDs as common safekeeper. Note that this does not necessarily mean that the Notes will then be recognised as eligible collateral for Eurosystem monetary policy and intra-day credit operations by the Eurosystem at any time during their life. Such recognition will depend upon the ECB being satisfied that Eurosystem eligibility criteria have been met.]
Any clearing system(s) other than [Not Applicable/give name(s) and Euroclear Bank SA/NV and Clearstream number(s)] Banking SA and the relevant identification number(s):
Delivery: Delivery [against/free of] payment
Names and addresses of additional [●]/[Not Applicable] Paying Agent(s) (if any):
9. DISTRIBUTION
(i) U.S. Selling Restrictions: [TEFRA C/TEFRA D/TEFRA not applicable] (ii) Method of distribution: [Syndicated/Non-syndicated]
(iii) If syndicated: [Not Applicable]
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(a) Names and addresses of [●] Managers and underwriting commitments
(b) Stabilising Manager(s) if any [Not Applicable/[●]]
(c) If non-syndicated, name and [Not Applicable/[●]] address of Dealer:
(iv) Prohibition of Sales to EEA or [Applicable] / [Not Applicable] UK Retail Investors:
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OVERVIEW OF PROVISIONS RELATING TO THE NOTES WHILE IN GLOBAL FORM
Clearing System Accountholders
Each Global Note will be in bearer form. Consequently, in relation to any Tranche of Notes represented by a Global Note, references in the Terms and Conditions of the Notes to "Noteholder" are references to the bearer of the relevant Global Note which, for so long as the Global Note is held by a depositary or a common depositary, in the case of a CGN, or a common safekeeper, in the case of an NGN for Euroclear and/or Clearstream and/or any other relevant clearing system, will be that depositary or common depositary or, as the case may be, common safekeeper.
Each of the persons shown in the records of Euroclear and/or Clearstream and/or any other relevant clearing system as being entitled to an interest in a Global Note (each an "Accountholder") must look solely to Euroclear and/or Clearstream and/or such other relevant clearing system (as the case may be) for such Accountholder’s share of each payment made by the Issuer to the bearer of such Global Note and in relation to all other rights arising under the Global Note. The extent to which, and the manner in which, Accountholders may exercise any rights arising under the Global Note will be determined by the respective rules and procedures of Euroclear and Clearstream and any other relevant clearing system from time to time. For so long as the relevant Notes are represented by the Global Note, Accountholders shall have no claim directly against the Issuer in respect of payments due under the Notes and such obligations of the Issuer will be discharged by payment to the bearer of the Global Note.
Conditions applicable to Global Notes
Each Global Note will contain provisions which modify the Terms and Conditions of the Notes as they apply to the Global Note. The following is a summary of certain of those provisions:
Payments: All payments in respect of the Global Note will be made against presentation and (in the case of payment of principal in full with all interest accrued thereon) surrender of the Global Note to or to the order of any Paying Agent and will be effective to satisfy and discharge the corresponding liabilities of the Issuer in respect of the Notes. On each occasion on which a payment of principal or interest is made in respect of the Global Note, the Issuer shall procure that in respect of a CGN the payment is noted in a schedule thereto and in respect of an NGN the payment is entered pro rata in the records of Euroclear and Clearstream.
Payment Business Day: In the case of a Global Note, shall be: if the currency of payment is euro, any day which is a TARGET Settlement Day and a day on which dealings in foreign currencies may be carried on in each (if any) Additional Financial Centre; or, if the currency of payment is not euro, any day which is a day on which dealings in foreign currencies may be carried on in the Principal Financial Centre of the currency of payment and in each (if any) Additional Financial Centre.
Exercise of put option: In order to exercise the option contained in Condition 9(f) (Redemption and Purchase – Redemption at the option of Noteholders) or Condition 9(g) (Redemption and Purchase – Redemption of the option of the Noteholders upon a Change of Control Put Event) the bearer of the Permanent Global Note must, within the period specified in the Conditions for the deposit of the relevant Note and put notice, give written notice of such exercise to the
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Fiscal Agent specifying the principal amount of Notes in respect of which such option is being exercised. Any such notice will be irrevocable and may not be withdrawn.
Partial exercise of call option: In connection with an exercise of the option contained in Condition 9(c) (Redemption and Purchase – Redemption at the option of the Issuer) in relation to some only of the Notes, the Permanent Global Note may be redeemed in part in the principal amount specified by the Issuer in accordance with the Conditions and the Notes to be redeemed will not be selected as provided in the Conditions but in accordance with the rules and procedures of Euroclear and Clearstream (to be reflected in the records of Euroclear and Clearstream as either a pool factor or a reduction in principal amount, at their discretion).
Notices: Notwithstanding Condition 18 (Notices), while all the Notes are represented by a Permanent Global Note (or by a Permanent Global Note and/or a Temporary Global Note) and the Permanent Global Note is (or the Permanent Global Note and/or the Temporary Global Note are) deposited with a depositary or a common depositary for Euroclear and/or Clearstream and/or any other relevant clearing system or a common safekeeper, notices to Noteholders may be given by delivery of the relevant notice to Euroclear and/or Clearstream and/or any other relevant clearing system and, in any case, such notices shall be deemed to have been given to the Noteholders in accordance with Condition 18 (Notices) on the date of delivery to Euroclear and/or Clearstream and/or any other relevant clearing system, except that, for so long as such Notes are admitted to trading on the Luxembourg Stock Exchange and it is a requirement of applicable law or regulations, such notices shall also be published in a leading newspaper having general circulation in Luxembourg (which is expected to be Luxemburger Wort) or published on the website of the Luxembourg Stock Exchange (www.bourse.lu).
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USE OF PROCEEDS
The net proceeds of any issue of Notes will be used by the Issuer for general corporate purposes. If, in respect of any particular issue of Notes, a particular use of proceeds is identified, such use of proceeds will be specified in the applicable Final Terms.
If a Tranche of Notes to be issued is described as "Green Bonds", the applicable Final Terms will describe the relevant "green" projects to which the net proceeds of the Tranche of Notes will be applied and refer to the relevant green bond framework, if any. A Tranche of Notes will be described as "Green Bonds" only if the net proceeds of such Tranche of Notes will be used to finance and/or refinance, in whole or in part, an Eligible Green Project. "Eligible Green Projects" means projects falling within the broad categorisation of "Green Project" pursuant to the then applicable "Green Bond Principles" published by the International Capital Markets Association (ICMA). Any green bond framework and any Second-party Opinion will be made available on the Issuer’s website. For the avoidance of doubt, none of these documents are incorporated into, or form part of, the Base Prospectus. For the avoidance of doubt, the Dealers have not undertaken, nor are responsible for, any assessment of the Eligibility Criteria, any verification of whether the Eligible Green Projects meet the Eligibility Criteria, or the monitoring of the use of proceeds of Notes issued under the Programme.
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DESCRIPTION OF THE ISSUER
OVERVIEW
ACEA S.p.A. ("ACEA" or the "Issuer") is a joint stock company (società per azioni) incorporated under Italian law. Its registered office and principal place of business is at Piazzale Ostiense, 2, 00154 Rome, Italy and it is registered with the Companies’ Register of Rome under number 05394801004. ACEA may be contacted by telephone on +39 0657991 and by fax on +39 0657994146.
ACEA was incorporated on 29 September 1997. Pursuant to Article 3 of its by-laws, the corporate existence of ACEA is set to end on 31 December 2050, but this term may be extended.
Pursuant to Article 4 of its by-laws, the main corporate purposes of the Issuer are: (i) the procurement, generation, transmission, distribution and sale of electric power and heat deriving from an energy source, in accordance with applicable provisions of law; (ii) the integrated management of the water resources including the collection, conduction, distribution, sewerage, purification and treatment as well as protection, monitoring and expansion of water basins; (iii) the management of public fountains and ornamental fountains; (iv) the planning, implementation and management of systems for public lighting as well as traffic lights and circulation-linked systems; and (v) the promotion, the diffusion and the implementation of actions and plants supplied with renewable and similar energy sources.
The ordinary shares of ACEA have been listed on the Italian Stock Exchange since 1999. As at 17 July 2020, ACEA had a market capitalisation of Euro 3,652.35 million, ACEA has been assigned a Baa2 issuer rating with a "stable outlook" by Moody’s Investors Service España, S.A. ("Moody’s"), and a BBB+ long-term issuer default rating with a "stable outlook" by Fitch Italia S.p.A., a subsidiary of Fitch Ratings Ltd. ("Fitch"). Moody’s and Fitch are established in the European Union and are registered under the CRA Regulation. As such, Fitch and Moody’s are included in the list of credit ratings agencies published by the ESMA on its website available (https://www.esma.europa.eu/supervision/credit-rating-agencies/risk) in accordance with the CRA Regulation.
ACEA is the parent company of an integrated group consisting of ACEA and its consolidated subsidiaries (collectively, the "Group" or the "ACEA Group"). The Group is an industrial group which deals with the management of energy, environmental and water services: the production, sale and distribution of energy, the development of renewable energy sources, the disposal and creation of energy from waste, public lighting and an integrated water service (aqueducts, sewerage and purification). The Group mainly operates in Italy (primarily in Rome as well as throughout other parts of Italy) and, to a lesser extent, with respect to the water sector, outside Italy (Honduras, Peru, Colombia and the Dominican Republic).
The Group provides services in, and focuses on, the consolidation and creation of value from, six main business areas:
− water sector, carrying out the activities of collection, transportation, distribution, treatment and sewerage;
− energy infrastructure sector, carrying out the activities of power generation, energy distribution and public lighting;
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− commercial and trading sector, carrying out the activities of energy and gas trading, sale of electricity and gas and district heating;
− engineering and services sector, carrying out the activities of laboratory analysis, research and planning;
− environment sector, carrying out the activities of waste to energy and organic waste to compost conversion; and
− overseas, using the Group’s know-how and distinctive expertise in managing infrastructure and export the business in which the Group operates (mainly water services in Latin America area).
For the financial year ended 31 December 2019, the consolidated revenues of the ACEA Group amounted to approximately Euro 3,186.1 million (an increase of 5.2 per cent. compared to the financial year ended 31 December 2018). For the financial year ended 31 December 2019, the consolidated EBITDA of the ACEA Group amounted to approximately Euro 1,042.3 million (an increase of 11.7 per cent, compared to the financial year ended 31 December 2018).
For the three-month period ended 31 March 2020, the consolidated revenues of the ACEA Group amounted to approximately Euro 833.5 million (an increase of 1.2 per cent. compared to the three-month period ended 31 March 2019). For the three-month period ended 31 March 2020, the consolidated EBITDA of the ACEA Group amounted to approximately Euro 276.4 million (an increase of 11.5 per cent, compared to the three-month period ended 31 March 2019).
HISTORY AND DEVELOPMENTS
ACEA was founded by the Municipality of Rome as a municipal company in 1909 under the original name Azienda Elettrica Municipale ("AEM") for the purpose of providing energy services for public and private usage throughout the Municipality of Rome. In 1937, the Governor of Rome entrusted AEM with the construction and administration of the municipal water system and water distribution network for the city of Rome. AEM was subsequently renamed Azienda Governatoriale Elettricità e Acque ("AGEA") and AGEA in 1945 became Azienda Comunale Elettricità e Acque ("A.C.E.A."). In 1964, following the expiry of a water concession previously held by another operator, the Municipality of Rome transferred to A.C.E.A. the assets used to conduct that operator’s water distribution business, notably the aqueduct of Marcio, bringing municipal water distribution under its sole control. In 1985, A.C.E.A. began water purification activities, servicing a customer base of approximately three million residents, which step constituted the foundation of its integrated management services for the entire water cycle. In 1989, A.C.E.A. adopted the name of Azienda Comunale Energia e Ambiente and took over the management of the public lighting services within the Municipality of Rome. Three years later it was transformed from a municipal company (azienda municipalizzata) into a special company (azienda speciale) and, with effect from 1 January 1998, was incorporated as a joint stock company under Italian law no. 142 of 8 June 1990, adopting its present name (i.e. ACEA S.p.A.).
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In 2001, ACEA became the third largest electricity distributor in Italy in terms of volumes distributed3, acquiring the electricity distribution division for the metropolitan area of Rome from Enel Distribuzione S.p.A.
In 2002, ACEA and Electrabel S.A. ("Electrabel"), a Belgian company and a member of the GDFSuez Group (previously the Suez Group), entered into a strategic joint venture (named AceaElectrabel) to develop energy activity in Italy: notably, production, trading and sales to free market consumers and customers under contract. The first full year of operation of the joint venture was 2003.
In the same year, ACEA and Electrabel, operating through a newly-incorporated company EblAcea S.p.A. ("EblAcea") participated in the consortium that purchased Interpower S.p.A. ("Interpower"), the third and final generation company sold by Enel S.p.A. as part of the generation downsizing programme imposed on Enel S.p.A. pursuant to the Bersani Decree. Interpower, now renamed Tirreno Power S.p.A., is the fourth largest electricity generator in Italy4.
In the same year, ACEA took over management of the whole sewerage system in Rome.
In 2004, ACEA launched the integrated water service in the ATO 2 area (Rome – Central Latium) and in the same year won the right to manage the service in new areas, consolidating its national leadership in water management. ACEA also purchased a stake in Tirreno Power S.p.A. in the same year and established a plan to increase energy production.
In 2006, ACEA purchased A.R.I.A S.p.A. (previously named TAD Energia Ambiente), entering the waste to energy market.
In 2010, the Board of Directors of the Issuer approved a preliminary termination agreement of the Acea-Electrabel joint venture between ACEA and GDF Suez Energia Italiana S.p.A. ("GSEI"). The unwinding of the joint venture between ACEA and GSEI was completed on 31 March 2011. For further details on this joint venture and its unwinding, please see "Description of the Issuer – Principal activities – Energy" below.
In 2011, ACEA Distribuzione S.p.A., following the admission to an incentive treatment granted by the ARERA, started the development of the Smart Grid pilot project.
On 23 January 2012, the purchase of the Piazzale Ostiense site was completed, taking advantage of the opportunity presented by the disposal carried out by Beni Stabili, by exercising the right of first offer set out in the lease, for a purchase price equal to Euro 110,000,000.
In 2012, in accordance with the general guidelines of the Group strategy aimed at monetising the Group’s non-core assets, the Group sold Apollo S.r.l., a company engaged in the photovoltaic business, to RTR Capital S.r.l. (a company within the Terra Firma group).
During the same year, the Group launched Project Acea 2.0 to enable the Issuer to fully integrate and manage all business processes using innovative mobile technologies. This innovation program was made possible by the new work force management system, a digital IT platform – developed by SAP Italia S.p.A. ("SAP") – that allows the Issuer to coordinate
3 Source: data elaborated by the Issuer’s management on the basis of publicly available information. 4 Source: data elaborated by the Issuer’s management on the basis of publicly available information.
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and monitor its activities and its suppliers in real time. The digitalization process initially involved the water networks in Rome and Frosinone and the electricity distribution network in Rome.
On 26 September 2015 ACEA ATO 2 S.p.A. ("ACEA ATO 2") opened its "Operations Room", meeting the deadlines set out in the project roadmap planned in its first work order to SAP. On 28 September 2015 customers were welcomed at the offices and obtained access to services using the new systems. During 2016, other subsidiaries implemented Project Acea 2.0, introducing innovative management processes and systems.
On 20 June 2016, Acea Distribuzione S.p.A., in compliance with the provisions of annex A to resolution 296/2015/R/com of the AEEGSI, changed its business name to ARETI S.p.A. ("ARETI"), adopting a new logo for exclusive use by ARETI as of 1 July 2016.
On 2 April 2019, the Board of Directors of the Issuer approved the new 2019-2022 Business Plan (the "2019-2022 Business Plan"). For further details and information on the 2019-2022 Business Plan, please see "Description of the Issuer – Strategy" below.
STRUCTURE OF THE GROUP
The Issuer is the parent company of the Group, which, as of 31 December 2019, was made up of 77 companies in which the Issuer holds shares, of which 55 are consolidated on the integral method and 22 are consolidated on shareholder’s equity.
The following diagram illustrates the main companies of the Group as at 31 March 2020:
PRINCIPAL ACTIVITIES
The Issuer exercises corporate, service, direction and control functions and its subsidiaries are operating companies in the integrated water services, energy infrastructure, commercial and trading of electric power and gas, environment, engineering and services and overseas sectors.
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The above principal activities are reconciled to the Group’s operating segments, which are presented consistently in the consolidated financial statements of the Issuer for the years ended 31 December 2019 and 2018, as follows:
• Water services: includes the operations in the Italian Integrated Water Services operating segment;
• Energy infrastructure: includes the operations in the Distribution, Public Lighting, Generation and “Industrial” Energy Efficiency operating segments;
• Commercial and trading: includes the operations in the Energy Management, Sale and “Retail” Energy Efficiency operating segments;
• Overseas: includes the operations in the Overseas operating segment;
• Environment: includes the operations in the Environment (i.e. sludge management, treatment, recycling, waste to energy and waste disposal) operating segment;
• Engineering and services: includes the operations in the Engineering & internal consultancy and Laboratory Analysis operating segments.
The tables in this section set forth the contribution to Revenues, Costs, Income from Equity Investments and gross operating profit (EBITDA) of each of the Group’s lines of business for the relevant reference period 5 . Such figures exclude intra-sector transactions between subsidiaries belonging to the same line of business, but show intra-group transactions which are condensed with the holding corporate results.
Gross Operating Profit (EBITDA) Year ended 31 December 2019 2018 millions of euro Water ...... 505.0 433.0 Energy infrastructure ...... 392.0 360.7 Commercial and trading ...... 69.1 76.1 Environment ...... 51.6 65.6 Engineering and services...... 13.0 20.4 Overseas ...... 16.9 14.8 Corporate/Consolidation Adjs...... (5.2) (37.3) Consolidated EBITDA ...... 1,042.3 933.2
5 In the following tables Revenues, Costs and EBITDA are data rounded to the first decimal figure. Due to this rounding the values shown may not correspond exactly to the sum of its parts.
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INTEGRATED WATER SERVICES AND GAS DISTRIBUTION
The Group is the leading provider of integrated water services to the Italian water market and the largest operator in Italy with a current customer base of approximately, 9,000,000 Italian residents representing approximately 15 per cent. of the entire Italian market.
In 2019, revenues from integrated water services amounted to Euro 1,012.0 million with an increase equal to Euro 210.9 million (26.3 per cent.) compared to the previous year (Euro 801.1 million). The net profits on non-financial investments related to water companies consolidated with the shareholders’ equity method amounted to Euro 37.2 million, with a decrease equal to Euro 2.7 million (6.8 per cent.) due to consolidation of Acquedotto del Fiora to 100%.
The table below shows the contribution to revenues, operating and personal costs, Income from equity investments and EBITDA of the Group’s integrated water services business segment for the financial years ended on 31 December 2019 and 31 December 2018.
Integrated Water Services Year ended 31 December 2019 2018 millions of euro Revenues ...... 1,012.0 801.1 Costs ...... 544.2 408.0 Income from equity investments ...... 37.2 39.9 Gross Operating Profit (EBITDA) ...... 505.0 433.0
In Italy, the water sector (as well as the energy sector) is governed by the ARERA (formerly AEEGSI), an independent body established under Law no. 481 of 14 November 1995 in order to regulate and control the electricity and gas sectors. The ARERA has been vested with extensive regulatory powers, as Article 21 of the Save Italy Decree ordered the abolition of the national agency for regulating and supervising water matters (which had only recently been set up), providing that the related functions and intrinsic financial and instrumental resources should be transferred to the ARERA and to the Italian Ministry for the Environment. The district public authorities (the Autorità di Ambito Territoriale Ottimale or ATO6), in accordance with the provisions of the ARERA, give recommendations on the water tariff for the district subject to approval of the ARERA.
Integrated water services in Italy are managed by ACEA under the concession regime (in regime di concessione) in the following Italian regions:
(1) Lazio, where ACEA ATO 2 and ACEA ATO 5, respectively, provide their services in the provinces of Rome and Frosinone;
(2) Campania, where Gori S.p.A. ("Gori") and Gesesa S.p.A., respectively, provides water services in part of the province of Salerno and in part of the province of Naples and in the provinces of Avellino and Benevento;
(3) Tuscany, where the Group operates in the province of Pisa through Acque S.p.A., in the province of Florence through Publiacqua S.p.A., in the province of Arezzo through
6 For a detailed description of the ATO and the water tariff mechanism, please see "Regulation" below.
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Nuove Acque S.p.A., in the provinces of Siena and Grosseto through Acquedotto del Fiora S.p.A. and in the province of Lucca through Geal S.p.A.;
(4) Umbria, where the Group operates in the province of Perugia through Umbra Acque S.p.A. and in the province of Terni through Umbriadue Servizi Idrici S.c.a.r.l.; and
(5) Molise, where the Group operates in the province of Campobasso through ACEA MOLISE S.r.l.
The service provided by the Group comprises (i) the management of the entire cycle of integrated water services from withdrawal at the springs to transportation via aqueducts and the water network, (ii) the distribution of water to end users and (iii) the purification of waste water in treatment plants.
Management of Water Services in Lazio
ATO 2 Central Lazio
The ACEA Group manages, as the sole operator, the integrated water services of ACEA ATO 2, covering Rome and its province, one of the largest Italian integrated water districts in terms of geographic area.
Supply sources supply drinking water are about 3,900,000 inhabitants of Rome and Fiumicino and more than 60 Municipalities of Lazio, through five aqueducts and a system of pipelines under pressure. Three additional sources of supply provide the resource not drinking water to be introduced into the Rome watering network.
At 31 December 2019, Acea Ato 2 manages a total of 6,842 kilometers of sewerage network, 709 sewage lifting systems - of which 220 in the territory of Roma Capitale - and a total of 166 waste treatment plants - of which 32 in the territory of Roma Capitale -, for a total of treated water equal to 584 million cubic meters (data referring only to the purifiers managed).
The company manages the waste treatment system and pumping stations that serve the network and sewage trunk lines.
As of 31 December 2019, the six main purification plants had treated a volume of water equal to about 514 million cubic meters with a slight increase (equal to 5%) caused by the rainfall, compared to what was treated in 2018 (490 million cubic meters).
Following the regulatory changes of 2019, the Acea Ato 2 implemented and continued all the activities that began in 2018. Specifically, taking into account that some solids produced by the managed plants do not comply with art. 41 of Italian Decree Law 109/2018 converted by Italian Law 130/2018, this company has continued with the transport of liquids within the authorised plants and has started the disposal of solids through the stipulation of international agreements. In February, with Determination R.U. 421 of 8 February 2019, the Metropolitan City of Rome, exceeding the ordinance issued in August 2018, authorised the treatment plant in East Rome to receive liquid waste. With regard to analytical certificates for sludge and waste, in 2019 there was a slight increase in the number of analyses carried out by Acea Elabori (external certified laboratory) compared to the average for the same period in previous years.
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With reference to the problem of seizures of wastewater treatment plants, note that the plants in Roma Nord and Botticelli were released on 13 May 2019 (Roma Nord) and 20 May 2019 (Botticelli) respectively.
As far as the Colubro treatment plant is concerned, following a request made by Acea Ato 2, the Judicial Authority granted temporary release from seizure of the aforementioned plant in order to get it up and running and to carry out the consequent verification of the purification process.
With regard to the Carchitti treatment plant, the temporary release from seizure granted by the Authority remains in effect.
ATO 5 South Lazio – Frosinone
ACEA ATO 5, ACEA’s 98.45 per cent. owned subsidiary, is the company which manages the integrated water services of ATO 5 Southern Lazio – Frosinone covering a geographic area with a population of approximately 490,000 inhabitants and 86 municipalities (the management of the Municipality of Paliano still remains to be acquired, while the Municipalities of Conca Casale and Rocca D’Evandro are "outside the scope"). As of 31 December 2019, ACEA ATO 5 covered a population of approximately 470,000 inhabitants, with a service coverage of approximately 97% of the territory. The company is also responsible for all other related, resulting or associated water activities. The water supply and distribution network covers more than 5,400 km and has a sewerage network of around 1,775 km which manages the return of the treated water to the environment.
The sewerage-purification system comprises a network of sewers and trunk lines connected to 122 waste treatment terminals. ACEA ATO 5 manages 219 sewage pumping plants and 132 purification plants, of which 116 are biological waste treatment plants, as well as 14 Imhoff tanks and 2 percolating filters.
With regard to 2019, the digitisation of the networks of the managed area continued, with the inclusion of data in the GIS - Geographic Information System. According to the 2019-2022 plan for significant activities, as of 31 December 2019 5,496 km of the water supply network had been digitised (1,205 km of supply network and 4,291 km of distribution network).
ACEA ATO 5 provides integrated water services on the basis of a thirty-year agreement entered into on 27 June 2003 between ACEA ATO 5 and Frosinone Provincial Authority (representing the Authority for the ATO comprising 86 Municipalities).
Management of water services in Campania
Gori, a joint-stock company in which ACEA’s 99.3 per cent. owned subsidiary Sarnese Vesuviano S.r.l. holds 37.05 per cent., is the company which manages the integrated water services of ATO 3 of the Campania region, known as the "Sarnese Vesuviano" area, where it provides water services in the northern part of the province of Salerno and in the southern part of the province of Naples. Gori provides integrated water services in services, not having yet ensured the start of IWS management by such company) which covers an area of approximately 900 square kilometres with a population of approximately 1.47 million inhabitants. A total of 4,941 km of water network is currently managed, consisting of 841 km of primary abstraction network and 4,100 km of distribution network, and a 2,418 km drainage system.
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Gori currently manages 12 water sources, 118 wells, 214 tanks, 122 water pumping stations, 184 wastewater pumping stations and 9 waste treatment plants.
Gori provides integrated water services on the basis of an agreement entered into on 30 September 2002 between Gori and the Water District Authority of Sarnese Vesuviano, which has a duration of 30 years.
Gesesa, a joint stock company which operates in Ato 1 Calore Irpino, promotes and develops the initiative for the Management of the Integrated Water Service in Municipalities in the Province of Avellino and Benevento.
Currently, the Authority –governed by the Extraordinary Commissioner referred to in DGR no. 813/2012 and merged into the regional EIC at the end of 2018 – has not yet assigned the management of the Integrated Water Service (aqueduct, sewerage and treatment) to a single operator. Gesesa manages the Integrated Water Service in 22 Municipalities in the province of Benevento for a total resident population of about 123,000 inhabitants spread over an area of about 710 square kilometres with a water infrastructure of about 1,541 km, a sewerage network of 553 km and about 300 plants managed. The total number of user accounts amounts to about 57,000, for which 2019 consumption has been estimated at about 8 million cubic metres of water.
The sewerage service is provided to approximately 80% of users while the purification service reaches about 40% of users.
Management of water services in Tuscany
Acque S.p.A. ("Acque") is the company that manages the integrated water services of ATO 2 Tuscany – Basso Valdarno covering a geographic area with a population of approximately 740.299 inhabitants and 57 municipalities in 2019, in the provinces of Florence, Lucca, Pisa, Pistoia and Siena. The water network covers nearly 6,000 km and the sewerage network is approximately 3,071 km long (with 150 (linked treatment plants. ACEA’s interest in Acque is through its 76.67 per cent. owned subsidiary, Acque Blu Arno Basso S.p.A. (after the purchase from Consorzio Toscano Cooperative of its one per cent. stake in Acque Blu Arno Basso S.p.A.), which in turn holds 45 per cent. of the share capital of Acque.
Acque supplies integrated water services on an exclusive basis in ATO 2 Tuscany on the basis of an agreement signed on 28 December 2001 (that came into effect on 1 January 2002) between Acque and the Water District Authority of Basso Valdarno, which has a duration of 20 years.
On 11 February 2015, the Water Regional Authority of Tuscany agreed upon the proposal submitted by the company to extend the concession period to 2026, and on 6 April 2016, an agreement was signed which confirmed such extension of the concession period. The Board of Directors of the Tuscany Water Authority approved the 2018-2019 tariff proposal, the update of the works programme, the updating of the economic and financial plan and the extension of the duration of the concession of service from the previous deadline of 31 December 2026 to the new deadline of 31 December 2031. On 9 October 2018, with Resolution no. 502/2018/R/Idr Arera approved the tariff proposal. The new Tariff plan with the end of the concession on 31 December 2031, compared to the previous plan with the end of the concession on 31 December 2026, contains the forecast of greater investments in service infrastructure and more contained tariff increases.
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Publiacqua S.p.A. ("Publiacqua"), in which ACEA’s 75.01 per cent. owned subsidiary Acque Blu Fiorentine S.p.A. holds 40 per cent., is the company that manages the integrated water services of ATO 3 Tuscany – Medio Valdarno with an area of approximately 3,720 square kilometres. The area includes 49 municipalities, including the provinces of Pistoia, Prato and Florence, and comprised approximately 1,244,000 inhabitants in 2019.
Publiacqua supplies integrated water services on the basis of an agreement signed on 20 December 2001 (that came into effect on 1 January 2002) between Publiacqua and the Water District Authority of Medio Valdarno, which has a duration of 20 years. The water network covers nearly 7,155 km and the sewerage network is approximately 3,712 km long with 128 linked treatment plants.
Acquedotto del Fiora S.p.A. ("Acquedotto del Fiora"), in which ACEA’s 99.51 per cent. owned subsidiary Ombrone S.p.A. holds 40 per cent., is the company that manages the integrated water services of ATO 6 Ombrone covering a geographic area of approximately 7,600 square kilometres in the provinces of Siena and Grosseto with a population of approximately 388,000 inhabitants in 2019 that increases, during the summer season, to approximately 620,000 inhabitants.
Acquedotto del Fiora supplies integrated water services, on an exclusive basis in ATO 6 Ombrone, on the basis of an agreement signed on 28 December 2001 between Acquedotto del Fiora and the Water District Authority of Ombrone. The concession term is 25 years from 1 January 2002.
In June 2015, Acquedotto del Fiora and a pool of banks entered into a project financing loan, for the refinancing of the outstanding debt and the financing of investments. At the end of the Negotiations, AdF obtained consent to modify the repayment terms starting from 2020 and to improve the financial conditions (spread on the Euribor equal to 1.9%), the latter supported by the issue of a guarantee by Acea to partially cover the payment obligations deriving from the contract. In this context, in view of the financial commitment required of Acea, the shareholders agreed to review the existing shareholders’ agreements, and consequently the provisions of the by-laws with regard to the governance of the company in order to attribute greater management powers to the private shareholder. The direct consequences of these changes led to the transfer of the consolidation of AdF from equity valuation to full consolidation of the equity investment held indirectly by Acea through its subsidiary Ombrone.
Nuove Acque S.p.A., in which ACEA’s 35 per cent. owned subsidiary Intesa Aretina S.c.a.r.l. holds 46.16 per cent., is the company that manages the integrated water services of ATO 4 – Alto Valdarno ("ATO 4") covering a geographic area of approximately 3,270 square kilometres with a population of approximately 300.000 inhabitants. The area includes 37 municipalities in the province of Arezzo.
Nuove Acque S.p.A. supplies integrated water services, on an exclusive basis in ATO 4, on the basis of an agreement signed on 1 June 1999 between the company and the Water District Authority of Alto Valdarno. The concession term is 25 years from 1 June 1999.
Crea S.p.A. – under liquidation, a wholly-owned subsidiary of ACEA, through which ACEA maintains a presence in ATO 1 – Northern Tuscany, holds a 48.00 per cent. stake in GEAL S.p.A. ("GEAL"), which is the only operating subsidiary. GEAL is the integrated water services operator in the municipal territory of Lucca, on the basis of a concession between the company and the Municipality of Lucca expiring on December 2025.
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Management of water services in Umbria
Umbra Acque S.p.A. ("Umbra Acque"), in which ACEA holds a 40 per cent. stake, manages the integrated water services of ATO 1 Perugia with a geographic area of 4,300 square kilometres, approximately 502,000 inhabitants in 2018 and 38 municipalities. The water network covers nearly 6,315 km and the sewerage network is approximately 1,685 km long, with 144 linked treatment plants. Umbra Acque provides integrated water services on the basis of an agreement entered into on 18 December 2002 between Umbra Acque and Water District Authority of Perugia, that came into effect on 1 January 2003, which has a duration of 25 years. Umbra Acque’s concession will expire on 31 December 2027.
On July 2015, the board of directors of Umbra Acque passed a resolution to buy one per cent. of Aquaser’s share capital.
The Issuer through Crea Gestioni S.r.l. ("Crea Gestioni") and Technologies for Water Services S.p.A. ("TWS"), both wholly-owned subsidiaries of ACEA, holds a 99.2 per cent. interest in Umbriadue Servizi Idrici S.c.a.r.l. ("U2"), which holds a 25 per cent. stake in Servizi Idrici Integrati S.c.p.a., the integrated water services operator in the province of Terni – ATO 4 of Umbria.
Management of Gas Distribution
On 11 October 2018, ACEA entered into an agreement with the companies Alma C.I.S. S.r.l. and Mediterranea Energia SCARL for the acquisition of 51% of the share capital held by them in the company Pescara Distribuzione Gas S.r.l., active in the distribution of methane gas in the Municipality of Pescara. The two seller companies, which will retain 49% of the share capital, will participate in synergy with ACEA in the industrial management of the infrastructure.
On 18 March 2019, ACEA, having obtained approval from the Municipality of Pescara, completed the acquisition of the share capital of Pescara Distribuzione Gas S.r.l.
Pescara Distribuzione Gas S.r.l. manages the entire distribution network of the Municipality of Pescara and owns about half of it, the remainder belongs to the municipality, for a total of 325 km of network and about 62 thousand grid points. The economic value of the transaction, in terms of enterprise value for 100% of the company, is € 17 million. As at 31 December 2019, the company is fully consolidated by ACEA.
ENERGY INFRASTRUCTURE
The Group is the third largest electricity distributor in Italy in terms of volumes of energy distributed and the second largest operator by number of end users. It distributes electricity to the municipality of Rome, serving approximately 2.8 million inhabitants as at 31 December 2019. The Group also manages the municipality’s public lighting and floodlighting service with over 220,000 light points.
In 2019 revenues from the Energy Infrastructure business segment amounted to Euro 683.3 million, with a decrease equal to Euro 5.7 million (0.8 per cent.) as compared with the previous year (Euro 689.0 million).
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The table below shows the contribution to revenues, operating and personnel costs and EBITDA of the Group’s Energy Infrastructure business segment for the financial years ended 31 December 2019 and 31 December 2018.
Energy Infrastructure Year ended 31 December 2019 2018 millions of euro Revenues ...... 683.3 689.0 Costs ...... 291.3 328.3 Gross Operating Profit (EBITDA) ...... 392.0 360.7
The increase in EBITDA is mainly due to tariff updates, equalisation and higher investments, as well as higher capitalisation of personnel costs.
Energy Distribution
The Group’s energy distribution activities are operated through ARETI, a wholly owned subsidiary of the Issuer.
ARETI runs the electricity distribution services in the municipalities of Rome and Formello.
In the municipality of Rome, ARETI serves approximately 1,627,000 users, corresponding to approximately 2.8 million inhabitants by means of a grid of cables and overhead lines covering more than 310,000 km.
ARETI also carries out the planning, design, construction and maintenance of high-voltage primary distribution plants and medium and low-voltage secondary distribution networks. ARETI also manages the cemetery lighting systems in the municipality of Rome.
The overall amount of electricity injected into ARETI’s network (from the national grid, generating plants linked directly to ARETI’s network and e-distribution interconnected network) for the year ended 31 December 2019 increase of 0.6 per cent. compared to the previous year.
Public Lighting Services
ACEA manages the public lighting and floodlighting service in the municipality of Rome, on the basis of a 30-year concession agreement that will expire in 2027. In March 2011, ACEA and the municipality of Rome renewed a management contract governing performance-related services for public lighting which will expire in 2027.
Such services include: (i) network modernisation; (ii) the installation of remote control units for public lighting equipment; (iii) plant repairs and maintenance; and (iv) artistic maintenance.
The services were entrusted to ACEA’s wholly owned subsidiary Acea Illuminazione Pubblica S.p.A. ("AIP") until December 2016, placed under liquidation on 13 December 2018.
In the context of the reorganisation of the Group, the partial spin-off of AIP’s business unit concerning structures in the technical and operating activities relating to "Rome public lighting" in favour of ARETI became effective at the end of December 2016, and such business unit has become the vehicle through which the Group takes part in tenders for public lighting services. As at 31 December 2019, 12,000 transformations were carried out (for a total of
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182,556 transformations), completing what had been envisaged in the LED Plan. Extraordinary maintenance and modernisation and safety activities agreed with Roma Capitale were also carried out, thus creating 3,110 new lighting points.
Energy Generation and Cogeneration
The Issuer operates in the electricity generation area mainly through Acea Produzione S.p.A. ("AP"), a subsidiary owned 81 per cent. by Acea Energia S.p.A. and 19 per cent. by the Issuer, carrying out the activities of power generation and cogeneration (district heating);
The AP production system is currently constituted by a group of generation plants, with an overall installed power of 226.6 MW, comprising five hydroelectric plants (three in Lazio, one in Umbria and one in Abruzzo), 52 photovoltaic plants (with an installed capacity of 8.6 MWp), two so-called mini hydro plants, Cecchina and Madonna del Rosario, two thermoelectric power stations, Montemartini and Tor di Valle, the latter consisting of a modern high-efficiency cogeneration plant, replacing the previous combined-cycle plant. The new plant consists of two high-efficiency methane gas powered engines each with an electrical power of 9.5 MW, for a total of 19 MW, as well as three supplemental boilers and 6 storage tanks. In the current configuration, in addition to selling electricity to the market during the most profitable hours, the plant provides electricity in SEU to the total electricity users of the adjoining Rome South Treatment Plant and the thermal energy necessary for the supply of district heating service in the districts of Torrino Sud, Mostacciano and Mezzocammino in the Municipality of Rome.
In 2019, AP generated a volume of 516.1 GWh through the directly owned power plants. During the period, AP's production was subdivided into the portion related to hydroelectric plant production of 417.9 GWh, the share of production from mini-hydro plants of 2.2 GWh, the share of thermoelectric production of 85.1 GWh and the portion related to photovoltaic production of 10.9 GWh. The AP's production mix is mainly from renewable sources with a share of "green" production equal to about 90% of the total. In addition, about 60% of total production is incentivised following investments in hydroelectric power plants or participation in the so-called "feed-in tariff" for the photovoltaic segment.
With regard to district heating, AP, through the cogeneration module of the Tor di Valle power plant, supplied heat to the Torrino Sud and Mostacciano districts (located in the south of Rome) for a total of 66.75 GWht, for a total of 3,406 utilities served (259 condominiums and 3,147 real estate units).
Acea Liquidation and Litigation S.r.l. (formerly Elgasud S.p.A., "Acea LL"), which operates in the Puglia and Basilicata regions, was set up on 10 November 2006 under a joint venture agreement between Amgas Bari, Amet Trani and AE. After the acquisition by AE of the 49 per cent. stake formerly indirectly owned by Amgas Bari and Amet Trani on 24 April 2015, the company is wholly owned by AE. On 10 December 2015, AE sold the company to the Issuer. Acea LL manages also residual photovoltaic plants. Moreover, as a result of the total spin-off of ACEA RSE, the tangible fixed assets consisting of the “Parco della Mistica” photovoltaic plant with a total installed power of 4,972 kWp were transferred to Acea LL.
In 2019, the Acea Group established two new companies, wholly owned (indirectly) by Acea, operating in the photovoltaic sector: Acea Solar S.r.l., for the development of greenfield projects, and Acea Sun Capital S.r.l., for the acquisition of existing photovoltaic plants.
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During the second half of 2019, Acea Sun Capital S.r.l. completed the acquisitions of several photovoltaic plants incentivised by the feed-in tariff for a total installed capacity of approximately 28 MWp. The most significant portfolio refers to the acquisition of 65% of the share capital of six vehicle companies owning 18 photovoltaic plants, with a total installed capacity of about 20MWp, which were owned by the Belenergia group. See also “Recent Developments below”.
Ecogena
As a result of the total spin-off of ACEA RSE on 30 December 2015, Ecogena S.p.A. ("Ecogena") is a wholly-owned subsidiary of AP. Nowadays, Ecogena is ACEA’s Energy Service Company, owns some energy cogeneration and local district heating plants, and offers services for heat management and energy efficiency for Business customers, real estate industry, Public Administration and residential complexes, also in EPC (energy performance contract) mode, starting from energy audit up to energy management phase, through the implementation phase of the intervention and managing the recognition of incentives provided for by current regulations.
In 2018, the Europarco power plant extension has began, following the signing of the Energy Service supply contract with ENI that has been connected to the Europarco District Heating.
The company’s production system is made up of a set of cogeneration plants, combined with district heating networks, for a total of 5.0 MW of installed electric power in Umbria and Lazio. The production of thermal and refrigeration energy is increasing compared to previous years, while there was a slight overall decrease in electricity production. As at 31 December 2019, Company achieved a production volume of around 14.3 GWh (electricity), 28.7 GWh (thermal) and 10.5 GWh of refrigeration.
With regard to Europarco's trigeneration plant, the expansion of the plant has almost been completed, doubling the cooling capacity installed in the plant with a relative increase in electricity and the addition of a third boiler. Ecogena also started work on improving the energy efficiency of the air conditioning system of the Acea data processing centre (Cedet), completed in February 2020. In 2019, Ecogena collaborated with Acea Innovation in the electric mobility sector, contributing with the first six installations of charging stations for electric vehicles in preparation for the pilot project for the launch of an electric carsharing service within the group.
COMMERCIAL AND TRADING
The Issuer operates in the Commercial and Trading business segment through the following main subsidiaries:
− Acea Energia S.p.A. ("AE"), a wholly-owned subsidiary, carrying out the activities of sales of electricity and gas and related services to final users and, after the merger with Acea Energia Holding S.p.A. ("AEH") in 2014, also the activities of trading energy, gas and heat in the domestic and international market; and
− Acea Energy Management S.r.l. ("AEMA"), a wholly-owned subsidiary established on 16 October 2015 whose corporate purpose is the supply of electricity, gas and fuel to the customers of the Group, as well as the management and optimisation of the energy portfolio. AEMA handles the commercial relations with the main national and foreign
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suppliers of electricity and gas and oversees the management of energy consumption levels.
In 2019, revenues from the Commercial and Trading business segment amounted to Euro 1,619.3 million, with decrease equal to Euro 73.9 million (4.4 per cent.) as compared with the previous year (Euro 1,693.2 million).
The table below shows the contribution to revenues, operating costs and personnel costs, and EBITDA of the Group’s Commercial and Trading business segment for the financial years ended on 31 December 2019 and 31 December 2018.
Commercial and Trading Year ended 31 December 2019 2018 millions of euro Revenues ...... 1,619.3 1,693.2 Costs ...... 1,550.2 1,617.1 Gross Operating Profit (EBITDA) ...... 69.1 76.1
Energy Management
AE carries out the energy management activities for the Group, in particular with respect to sale and production.
AE may act directly as the contractor, pursuant to art. 7 of Legislative Decree No. 50 of 18 April 2016, under the relevant supply contracts from affiliate companies belonging to the Group which were also the contracting entities.
The company also liaises with the Energy Market Operator ("GME") and with Terna S.p.A. ("Terna"). In relation to Terna, AE is the shipper for dispatching on behalf of AP and other companies in the ACEA Group.
It performs the following main activities:
• the optimisation and assignment of electricity produced by the Tor di Valle and Montemartini thermoelectric plants and by the S. Angelo hydroelectric plant; and
• the negotiation of fuel procurement contracts for the power generating plants generating for Tor di Valle plant.
In 2019 Acea Energia purchased electricity from the market for a total of 8,673 GWh, of which 6,751 GWh through bilateral contracts and 1,921 GWh through Borsa, for resale to end customers of the free market and for the optimisation of energy flows and the purchasing portfolio.
Electricity and gas sales
As far as the sales market is concerned, the retail portfolio continues to grow and the quality of service improved.
In 2019, AE sold electricity on the standard market for a total of 2,197 GWh, with a 6.3% reduction on a trend basis. The number of withdrawal points totalled 774,823 (832,719 at 31 December 2018). The sale of electricity on the free market amounted to 3,826 GWh for AE
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and 409 GWh for Umbria Energy, for a total of 4,235 GWh, with an increase compared to last year of 14.9%, primarily related to the B2B segment.
In addition, AE and the other sales companies of the Group sold 139.8 million Sm3 of gas to end customers and wholesalers which involved 192,107 re-delivery points, while at 31 December 2018 they were 172,755.
AE also operates in local markets through the following joint ventures:
− Umbria Energy S.p.A. ("UE"), which operates in Umbria, was set up on 24 September 2004 as a joint venture between ASM Terni S.p.A. and AE, with each shareholder holding 50 per cent.
− Cesap Vendita Gas S.r.l. ("CVG"). As part of the restructuring of the investment in the Sin(e)rgia Group, in February 2015 UE took over 100 per cent. of CVG through a capital increase by contribution in kind of UE’s credit with CVG. This investment was previously held by Si(e)nergy S.p.A. in liquidation.
Customer Care
The main business of Acea8cento S.r.l., a wholly-owned subsidiary of ACEA, is planning and performing customer care services for the companies of the ACEA Group through all the long- distance channels. The company works in partnership with the companies of the ACEA Group throughout the development, acquisition and consolidation phases in relation to new customers and deals with customers’ satisfaction, retention and value enhancement in relation to old customers.
ENVIRONMENT
The Environment business segment coordinates the activities of the Group companies operating in the areas of waste management and waste-to-energy conversion. The Group operates in such areas in Umbria, Lazio and Tuscany. The overall amount of waste treated in 2019 was approximately 1,219 kTon, an increase of 99 kTon (26.5 per cent.) on 2018 (approximately 1,120 kTon). The total amount of electricity sold in 2019 was approximately 327 GWh, a decrease of 28 GWh (7.9 per cent.) compared to the previous year (approximately 355 GWh).
In 2019, revenues from the Environment business segment amounted to Euro 182.9 million, with an increase of Euro 9.0 million (5.2 per cent.) compared to the previous year (Euro 173.9 million).
The table below shows the contribution to revenues, operating costs and personnel costs and EBITDA of the Group’s Environment business segment for the financial years ended 31 December 2019 and 31 December 2018.
Environment Year ended 31 December 2019 2018 millions of euro Revenues 182.9 173.9 Costs 131.3 108.3 Gross Operating Profit (EBITDA) 51.6 65.6
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The main Group companies operating within the Environment business segment include Acea Ambiente S.r.l. ("ACEA Ambiente") and companies within the transport and recovery of treatment sludge sector (each described below).
Acea Ambiente
ACEA’s wholly-owned subsidiary ACEA Ambiente, previously called A.R.I.A. S.r.l., in addition to the coordination and provision of services to its wholly-owned subsidiary S.A.O. S.r.l., is engaged in the management of waste treatment plants, the recycling and disposal of solid urban and special waste, renewable electricity production and waste management, as well as in the direct management of assets contributed by its plants. The company has electricity vending relations with AE to which it transfers volumes of energy produced by the two lines of the San Vittore plant in excess of the volumes purchased under the CIP 6/92 regime by Gestore dei Servizi Energetici S.p.A. (GSE), by the new line of San Vittore del Lazio plant rebuilt in 2016 and by the line of the Terni plant, the state-owned company which promotes and supports renewable energy sources.
ACEA Ambiente is considered a major waste operator in Umbria and Lazio and manages the UL1, UL2 and UL3 plants.7
Moreover, with the aim of significantly boosting business within this segment, overcoming the fragmentation and redundancy of the structures dealing with strategic processes (in particular, trade development), business and staff and enabling a greater focus on the activities covered by the strategic plan, the following strategic transactions were carried out:
Bioecologia S.r.l.
On 29 November 2018, ACEA Ambiente acquired from Siena Ambiente S.p.A. the 100% of the share capital of Bioecologia S.r.l., a company operating in the liquid waste purification, treatment and intermediation sector (“Bioecologia”). The activity is carried out in the treatment plants located in the municipalities of Chiusi, Buonconvento and Colle Val d’Elsa.
Following the Board of Directors’ meeting of 7 December 2018, convened for the establishment of the new management, after an initial phase of reconnaissance of the plants and processes, the appropriate initiatives were initiated to resolve some critical issues and to set the plan for rationalization and development of the business activities of Bio Ecologia Srl, in accordance with the provisions of the Director of the Environment Area of ACEA.
In particular, the focus was on the aspects of managing worker safety and complying with environmental requirements.
On environmental issues, special attention was paid to the verification and monitoring of emissions of the company’s production sites, in accordance with the authorised requirements. All the analytical determinations that have been issued to the accredited laboratory demonstrate that the authorised limits have been respected.
In the short term since the takeover of the plants, much of the activity has therefore focused on analysing potential environmental issues and identifying priority interventions to prevent or mitigate them. The technical management of the plants and the performance of the purification
7 Source: ISPRA Report "Rapporto Rifiuti Urbani – Appendice Quadro Regionale".
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and waste treatment services have been strongly conditioned by the good working order of the machines and equipment, and for this reason maintenance and modernisation works are under way and/or planned for the near future, aimed also at improving the efficiency of the current plant.
It is clear that all the most important plant redevelopment projects proposed at this stage have also been sized in anticipation of the future plant revamping works.
At the end of February 2017, ACEA acquired ISECO S.p.A. as part of the acquisition of the TWS Group (Technologies for Water Services).
The company ISECO S.p.A is part of the environment area of the TWS Group: it has been operating since 1987 in the sector of water services and in the production of whey powder, dealing with the executive design, construction and management of industrial ecological plants, also with complex technology and public service, and managing the plant for drying of whey from Saint Marcel, in the Valle d’Aosta region.
Terni waste-to-energy plant (UL 1)
The waste-to-energy plant located in Terni produces electricity from renewable sources, and operates specifically in a pulper paper mill waste to energy plant.
The waste pulper contributions allowed the plant to meet the combustible requirements for the entire year and reach expected performance levels as regards both waste pre-treatment and the production of electricity. Some interventions were made in 2016 to enhance plant performance, leading to increased efficiency in terms of containing operating costs. The verification procedure implemented by the GSE has been successfully completed.
Acea Ambiente has submitted an authorisation request for expansion of the category of non- hazardous waste that may be treated for energy recovery purposes. The procedure for the relevant Environmental Impact Assessment (Valutazione di Impatto Ambientale – VIA) is currently in its verification phase before the competent offices of the Umbria Region.
In 2019, the contractual planning for the delivery of pulper waste guaranteed the fuel requirements for the entire period, and the expected performance was affected – both as regards waste pretreatment activities and the production of electricity – by controlled operation at a reduced load and a shutdown for maintenance earlier than planned, carried out to perform functional checks of the plant aimed at solving critical issues on atmospheric emissions. Starting in April 2019, there was a variable and increasing trend in the quantities of micropollutants in the plant’s atmospheric emissions compared to historical data, though still within legal limits. In compliance with authorisation requirements, monitoring was carried out with initial feedback sent to the control bodies. After proper verification, the results confirmed compliance with the emission limits, with values in line with historical data.
Paliano RDF production plant (UL 2)
The Paliano RDF production plant has a single authorisation for the production of Refuse Derived Fuel ("RDF"), expiring on 30 June 2018. Although the authorisation has expired, in June 2020 the Municipality of Paliano issued the building permit for the complete reconstruction of the building, the re-qualification of the related site and the implementation of ancillary services.
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In June 2013 the plant was partly destroyed by a major fire, and the facility was subsequently seized by the judicial authorities for evidentiary purposes until November 2014. After completion of the technical assessment, as required by the judicial authorities, ACEA Ambiente carried out analytical and structural studies to implement an action plan to clean the affected areas and replace and rebuild the RDF production plant. In 2015, following a complex analysis with the competent territorial bodies, the plants and buildings affected by the accident were cleaned and demolished, and the first part of the requalification of the industrial site was concluded.
ACEA Ambiente subsequently took steps to obtain building permits to reconstruct the affected buildings. The work carried out so far and the additional procedural authorisation obtained by ACEA Ambiente will make it possible to reopen the analysis procedure to obtain an integrated environmental authorisation ("Integrated Environmental Authorisation") (Autorizzazione Integrata Ambientale – AIA) for the plant’s operation. In order to resume RDF/SSF production as soon as possible, ACEA Ambiente has already begun the procedure for selecting the contractor who will rebuild the plant. Environmental surveys were carried out in accordance with planning time estimates approved by the competent area authorities. The surveys performed on site in December 2015 confirmed there was no contamination. The schedule of controls was then completed. In December 2015, ACEA Ambiente determined the compensation for damages suffered in the fire to be equal to Euro 5.2 million and obtained a refund.
The environmental checks have been completed according to the planning provisions approved by the competent territorial authorities, confirming the absence of contamination due to the fire which occurred in 2013. However, contamination thresholds were exceeded in the water supply, which are likely to be linked to the base values present in the Castellaccio di Paliano area, which is mainly formed of volcanic soil. In accordance with applicable law, ACEA Ambiente submitted the environmental check plan to the competent authorities, which will need to authorise the beginning of the monitoring phase. As regards the authorisation for the reconstruction and operation of the CDR/CSS production plant, on 18 October 2017 the Office of Public Works, Maintenance and Regional Planning of Paliano expressed an unfavourable opinion in the decision making AIA Conference on the compatibility of the CRD/CSS production plant in the municipality of Paliano. Therefore, ACEA Ambiente has undertaken legal action before the competent Administrative Court that is still ongoing.
With regard to the characterization activities of the former purification plant area, the procedures useful to carry out treatments in situ are being verified, on the basis of the results of the sampling and analysis carried out by both ACEA Ambiente and ARPA Lazio. In parallel, sampling and analysis will be carried out on the remaining area of Castellaccio, already defined in the Ministry of the Environment's decree. At present, work has begun on the preparation of the reclamation project.
San Vittore del Lazio waste-to-energy plant (UL 3)
The San Vittore del Lazio waste-to-energy plant also produces electricity from renewable sources, and, specifically, from RDF.
Plant reconditioning works were completed in 2011 through the implementation of lines two and three of the plant, while works for the complete renovation of line one were completed in October 2016.
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In 2015, lines 2 and 3 of the plant demonstrated high performance, both in terms of the electricity produced and in terms of RDF used for energy recovery. Both lines recorded over 8,000 operating hours/year. Measure No. G00063 of 13 January 2016, notified on 26 January 2016, granted the new Integrated Environmental Authorisation valid for 8 years from 24 July 2013 to 24 July 2021. This authorisation completes the procedure for renewing the Authorisation for construction and operating the plant, meaning significant rationalisation in terms of authorisation requirements for the San Vittore del Lazio plant. The procedure in question will also make it possible to begin some additional work on the industrial site to improve the quality of communal and staff areas.
In January 2017, the procedure for the renewal of the Integrated Environmental Authorisation of the plant was obtained and the coordinated Environmental Impact Assessment (Valutazione Impatto Ambientale – VIA) / Integrated Environmental Authorisation applications were also submitted to the Lazio Region to update the Integrated Environmental Authorisation for the plant with operations on three lines, to be used at the maximum thermal load levels. The process ended with a positive outcome in June 2017. Lines 2 and 3 of the plant, which are currently operating under normal conditions, permitted regular operations during the course of 2016 until today, in terms of both the electricity produced and the CDR started for energy recovery. As regards Line 1, the reconstruction was completed during September 2016 and the plant has been working at its full capacity since October 2016. The start of ordinary operations for this plant was authorised on 13 April 2017.
As at the date of this Base Prospectus, the San Vittore plant is the only waste-to-energy plant on a regional scale and represents a strategic terminal for the waste chain.
By order of the President of the Lazio Region no. Z00001 of 5 July 2019 (subsequently renewed), in order to ensure the treatment phase of the waste management cycle, ACEA Ambiente was ordered, among other things, to carry out a series of activities with regard to the San Vittore del Lazio waste-to-energy plant. Specifically, the plant had to operate with immediate effect at the maximum authorised treatment capacity on a daily basis, guaranteeing treatment even on public holidays.
On 23 May 2019, a new agreement was signed with the Municipality of San Vittore del Lazio, to govern (i) the relationship between the company and the Municipality until 31 December 2019, and (ii) the payment of the so-called externalities arising from the plant’s operation, pending the signing of the final agreement and, in any case, under an extension until 31 December 2021. This agreement also represented a settlement of pending litigation and current disputes between the parties in relation to the fees as well as a settlement of any tacit settlement of charges and collection premiums for the year 2018 and for the first half of 2019. As a result of the new public tender that went without bids for the service of transport and recovery/disposal of bottom ash, fly ash and PSR produced by the plant, in June 2019 the service was extended by private negotiation with the outgoing company until 31 March 2020. Following the launch of this procedure for the new Regional waste plan, on 6 August 2019, Acea Ambiente submitted comments aimed at better configuring the fourth line that the waste plan envisages for the San Vittore site.
Orvieto waste dump plant (UL4) formerly SAO S.r.l.
The waste dump plant is located in the municipality of Orvieto and manages urban and special waste. In particular, on the same site there is a non-hazardous waste dump, currently being
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cultivated, and a non-separated biological mechanical waste treatment plant for the separation and sale of organic waste from separate collection. In March 2014, the company began waste treatment plant reconditioning and, as a consequence, waste transfer to this plant ceased on 30 April 2014. During 2014, the company completed the construction of the frontal capping and filed the relevant environmental authorisation application to make substantial changes to the Orvieto plants. The aim of the project is to achieve the following: (i) the extension of landfill volumes, with an alternative cultivation system to optimise the running of currently managed areas, (ii) an increase in the net capacity of the landfill, (iii) extension of the useful life of the landfill guaranteeing continuity of the essential public service for the municipal waste processed, (iv) management of area planning and the option to deal with mutual assistance as required by current Regional Legislation across ATOs, (v) control of the tariff for the disposal of waste in the landfill for the benefit of the Municipalities using the same, and (vi) a reduction in the use of natural resources as technical materials.
In July 2015, the third and final Services Conference was held after which the Orvieto waste dump plant filed an Integrated Environmental Authorisation application to make substantial modifications to the Orvieto waste dump plant. At the Integrated Environmental Authorisation Services Conference the examined material was unanimously approved. Subsequently, the competent Regional Authority re-commenced the Environmental Impact Assessment procedure and in September 2015 and November 2015 Environmental Impact Assessment conferences were held in which the Orvieto waste dump plant described the above project to the participating bodies. On 13 January 2016, the President of the Committee for Regional Coordination on Environmental Assessment called a meeting of the committee to carry out an assessment.
The principal revamping work was done on the Orvieto waste treatment plant. This made the first parallel with the grid operator possible with the progressive start-up of all sections of the plant in the last quarter of the year. On 30 October 2015, the company bought out the biogas to energy plant business owned by another company. The biogas is produced in the Orvieto waste dump plant.
As part of a survey on waste to energy plants in the Province of Terni, in November 2015, the GSE carried out an audit in accordance with art. 7 of Law 241/1990, concerning the renewable energy sources (RES) qualification of the Orvieto Biogas plant. The Terni Provincial Authority confirmed that the Orvieto plant’s operations and waste recovery activities were also fully compliant with the provisions of the applicable law. The GSE completed its analysis of the procedure for the access to incentives with a positive valuation.
In 2016, in compliance with the Integrated Environmental Authorisation and the signed contracts, the conferment of urban and special non-hazardous waste continued, starting the recovery and disposal operations in accordance with the terms provided therein. As regards the recovery plant, performance in 2016 was characterised by a phase of stabilisation of the new treatment and composting plant within the energy recovery section. With regards to the project submitted in 2014 for the morphological adjustment of the site and the optimisation of volumes and frontal capping, the Umbria Region interrupted the checking phase without justification and, therefore, the company has undertaken the necessary legal action.
In addition, in May 2017 Acea Ambiente appealed to the courts for the annulment of a resolution of the Umbria Regional Council, as well as of all related administrative acts. Pursuant to such resolution, the Umbria Regional Council qualified as "insurmountable" the objection expressed by the municipality of Orvieto in the context of the coordinated
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Environmental Impact Assessment / Integrated Environmental Authorisation procedure relating to the project for the morphological adjustment of the Orvieto site and the optimisation of volumes and frontal capping. Following a series of institutional meetings held at the Umbria Region’s offices in June, July and September, Acea Ambiente submitted an amendment to the project that allowed the verification of environmental compatibility activities during the Environmental Impact Assessment to continue. The work of the Services Conference restarted in January 2018. The process (Environmental Impact Assessment – Valutazione di Impatto Ambientale or VIA) ended with a positive outcome in June 2018, with a new capacity authorization for about 400,000 tonnes.
On 28 August 2019, in order to optimise plant performance in terms of odour, ACEA Ambiente submitted to the Umbria Region a non-substantial amendment request for the installation of a concentrated aspiration system and subsequent collection of the extracted air to the air treatment system serving the quality waste treatment and composting plant. To date, the Umbria Region has not yet responded to the request.
On 12 November 2019, ACEA Ambiente also presented a revision of the economic and financial plan (“EFP”) to the AURI of Umbria for the revision of the tariffs established in the resolution. AURI, by resolution of the Conference of Mayor no. 16 (Resolution no. 16 AURI) of 3 December 2019, approved the tariffs referred to in the aforementioned EFP but just for the years 2019 and 2020, concurrently acknowledging that these tariffs must in any case be considered provisional since the definitive ones will be those that the AURI will determine as a result of the proceedings initiated by Resolution no. 225/2018/R/Rif, and that therefore the tariffs in question would in any case be subject to adjustment. With a note dated 6 December 2019, AURI then proposed – pending approval of the area plan – the planning of urban waste flows to treatment, recovery and disposal plants for the year 2020.
The transport and recovery of treatment sludge activities
All the activities of transport and recovery of treatment sludge were previously carried out by Aquaser S.r.l., Kyklos S.r.l., Solemme S.p.A. (from 1 July 2015. the merger of S.A.MA.CE. S.r.l. into Solemme S.p.A. came into effect) and Isa S.r.l. Until the end of 2015, such companies were called the "Aquaser Group". Since 2016, due to the corporate reorganisation described above, the quota and shares in these companies belong to Aquaser (ISA) and ACEA Ambiente (Kyklos S.r.l. and Solemme S.p.A.).
The facilities of the former Aquaser Group, through the treatment of sewage sludge coming from the integrated water operators of the Group, allow significant synergies between the Group companies operating in the environmental sector and those in the water sector. The integrated water operators, which are required by law to dispose of sewage sludge that is produced at the end of the water cycle process, can reduce the costs of such disposal by transferring their final waste to specialised environmental facilities instead of disposing of them in landfills or at other sites outside the Group. At the same time, the environmental companies benefit from a continuous and consolidated supply of organic waste to be converted into marketable products.
AQUASER S.r.l. ("AQUASER") was set up in order to manage ancillary services associated with the integrated water services, undertaking the recovery and disposal of sludge from biological treatment and waste produced from water treatment, treating effluent and liquid waste, and providing services connected thereto. The company is 88.29 per cent. owned by
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ACEA, 8.00 per cent. owned by Acquedotto del Fiora, 1.00 per cent. owned by Umbra Acque, 1.00 per cent. owned by Publiacqua and 1.71 per cent. owned by Acque.
AQUASER currently transports and recovers sludge for most of the water companies in the ACEA Group. The location of the plants is important: two in Lazio, which process the sludge transferred under the contract with ACEA ATO 2 and ACEA ATO 5, and one in Tuscany near Grosseto, which processes the sludge transferred under the contracts with companies operating in Tuscany and Umbria, resulting in a reduction of transportation costs.
During 2015, AQUASER started providing a sludge dewatering, loading, transportation and recycling/ disposal service also for GE.SE.SA. Recycling activities involved spreading the sludge on farmland (on the basis of an authorisation mainly held by AQUASER) or conferred to the composting plants of controlled/ associate companies or those of third parties, while the remaining waste was disposed of almost entirely in third party treatment plants/dumps.
During 2019, the company consolidated its market position by strengthening its transport activities through the acquisition of vehicles and personnel that now allow the management, at least partially, of the corresponding services.
ACQUASER currently wholly or partially performs the service of loading, transport and recovery/disposal of waste from water purification for the companies of the Acea Group.
ISA S.r.l. ("ISA"), a company which merged into ACQUASER with effect from 1 November 2016 after the corporate reorganisation process described above, previously operated in the services, logistics and transportation sectors, with a strategic importance to reach market consolidation objectives.
ISA was bought to strengthen the group organization and provide group services in a more independent way, not only transportation but also services relating to other activities associated with and complementary to the farmland spreading of sludge, the maintenance of the drying beds and automatic discharge services, which have led to a significant increase in business activities. ISA’s services are almost exclusively provided to associate companies. ISA currently has its own fleet for haulage activities.
Aprilia waste treatment plant (UL7), previously called Kyklos S.r.l. ("KYKLOS")
With effect from 29 December 2016, KYKLOS merged into ACEA Ambiente after the corporate reorganisation process described above. The plant operates in the waste treatment sector.
It produces and markets mixed compost conditioners; in particular it operates in the areas of Campoverde in Aprilia on the basis of a single authorisation for special non-hazardous waste treatment and recycling plants obtained from the Province of Latina with a maximum capacity of 66,000 tonnes/year.
On 28 March 2013, the company obtained the permission to increase capacity to up to 120,000 tonnes per annum through the construction of a biogas plant with the recovery of electricity and heat energy. In January 2016, its business activities resumed, after being subject to the seizure ordered by the Deputy Public Prosecutor’s Office of the Court of Latina due to an accident which had occurred in 2014 in the company’s composting plant where two people working for one of the external contractors died. While the plant was under seizure, it was
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impossible for KYKLOS to generate revenues, and as it was obliged to pay the costs of its financial commitments, ACEA provided KYKLOS with the necessary financial resources to cover its debts.
The plant reopened on 1 June 2016 and resumed its normal operations. The restrictions imposed by the competent Authorities for the return to operations following the release of the plant, have affected the potential of the plant during this initial phase. In December 2016, the works for the realisation of the new plant configuration were started, and this will enable the expansion of the current treatment capacity of the plant, also thanks to a new energy recovery section.
In 2017, the plant carried out ordinary operations, which involved the treatment of different types of authorised waste. However, in December 2017, supervisory authorities issued a preventive urgent seizure order for the entire plant, following an audit that found that strong miasmas coming from the production cycle were causing discomfort to citizens living in the immediate vicinity of the plant. Subsequently, the Lazio Region notified a formal order to adopt a number of measures in order to remedy the critical issues.
Although ACEA Ambiente believes that it can prove that the system has been managed in compliance with the requirements of the Integrated Environmental Authorization, the company is also adopting the measures imposed by the Lazio Region in a timely manner and is confident about the imminent resolution of the issue. In May 2018, Acea Ambiente UL7 plant partially restarted its activities.
The Lazio Region initiated the procedure for the review of the current authorisation, and on 16 January 2019 the first session of the services conference was held, and the second session was held on 28 June 2019. On 23 July 2019, the company submitted all the additional/replacement documentation requested. The Lazio Region convened the third session of the services conference on 24 September, subsequently postponed to 1 October.
During the session of the services conference, in order to accelerate the construction of the emission chimneys, i.e. the work proposed voluntarily by ACEA Ambiente with which the biofilters will be completely closed and the air conveyed at high into the air through expulsion chimneys, the Lazio Region decided to send a request for a nonsubstantial change to the Integrated Environmental Authorization. The design documentation was promptly delivered on 7 October 2019. The Lazio Region authorised the above non-substantial amendment. The company immediately worked to identify the supplier, both for the executive design and for the construction of the three chimneys.
During the period of reference the plant operated, without prejudice to the seizure with right of use which was otherwise regulated during the current year.
With regard to the new anaerobic digestion plant section, the work was completed on 19 November 2019 with the drafting of the mechanical completion. With a note dated 4 December 2019, the Lazio Region sent the acknowledgement of the test certificate. It was therefore possible to start provisional operation of the plant. Then the sorting/pre-treatment line was started and the digesters were loaded with waste and inoculum according to a loading plan provided by the supplier.
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On 20 December 2019, once all technical and administrative activities were completed with the grid operator, the first parallel with the electricity grid was carried out. The plant thus formally commenced operations on that date.
Monterotondo Marittimo plant (UL5) and Sabaudia plant (UL6), previously called SOLEMME S.p.A. ("SOLEMME")
With effect from 29 December 2016, SOLEMME merged into ACEA Ambiente after the corporate reorganisation process described above. The plants, after the merger of S.A.MA.CE. S.r.l. into SOLEMME, have operated since 1 July 2015 in the waste recycling sector, composting organic waste, in particular sludge, from civil waste treatment and producing mixed compost conditioners. Therefore, the two plants are: (i) the Monterotondo Marittimo plant (UL5), a composting plant which is included in the Grosseto Provincial Authorities’ waste management plan; and (ii) the Sabaudia Plant (UL6), which recycles and disposes of waste according to the Integrated Environmental Authorisation issued by the Lazio Regional Authority.
The reference market of the Monterotondo Marittimo plant is residential sludge produced in Tuscany, and, in particular, within the territorial scope of ATO6 Ombrone, in the Provinces of Grosseto and Siena as well as from the treatment of waste from separate collection.
With specific reference to the Monterotondo Marittimo plant, under Tuscany Regional Decree 3866, in June 2016 the Integrated Environmental Authorisation was granted for operating the plant in its current configuration and for the realisation of the expansion plan, consisting of enhancing the current plant and including an anaerobic digestion section. The procedure for identifying the business entity that will deal with the executive design and realisation of the new plant layout was completed and, in April 2018, the construction of the new areas of the plant started. The monitoring and control activities requested under the Integrated Environmental Authorization were carried out, while the plant continued to carry out its existing operations. On 7 February 2017, the Tuscany Region issued Regional Decree No. 1175, pursuant to which ACEA Ambiente obtained the Integrated Environmental Authorization initially issued in favour of the incorporated SOLEMME.
With reference to the activities of the plant, on 31 December 2017 the delivery of waste was interrupted in order to proceed with revamping and expansion. During the month of May 2018, construction activities began for the construction of the new plant, and during June 2018 the works were handed over definitively. On 13 September 2019, a communication was sent to the Tuscany Region for the start of organic waste transfers from 14 October 2019, with a description of the various phases of plant activation. The transfer of woody materials began on 22 October 2019, while on 31 October 2019, in compliance with the applicable Integrated Environmental Authorization’s requirement, the certificate of completion of the work necessary for the start of the transfer of organic waste – which began on 4 November 2019 – was submitted. The first parallel with the electricity grid took place on 5 December 2019.
With regards to the Sabaudia plant (UL6), during the third quarter of 2015 the company filed an application to increase its capacity by up to 50,000 tonnes per annum of compostable waste, with the construction of a new aerobic composting section, so as to attain an overall capacity of 78,000 tonnes per annum of treatable waste.
With regard to the composting section of the Sabaudia plant, the Integrated Environmental Authorisation issued by the Lazio Region on 1 December 2008 is still being renewed. In any
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case the Integrated Environmental Authorisation was formally extended by the Lazio Region pending the conclusion of the authorisation process. During this process, the Province of Latina requested the acquisition of the water authorisation. ACEA Ambiente obtained the authorisation from the Lazio Region and a favourable opinion for the water concession of areas belonging to the water/fluvial state property from the Consorzio di Bonifica dell’Agro Pontino.
On 27 November 2019, the Province of Latina issued the state concession/authorisation for water alone. In order to comply with the requirements of the state concession, it was necessary to carry out certain projects to temporarily interrupt waste management in order to avoid interfering with the work. A suspension of deliveries was implemented starting from 31 October 2019. Operationally, with the temporary suspension of the deliveries, the last composting cycles ended by February 2020. The work necessary to comply with the requirements of the water opinion are expected to be implemented in 9-10 months.
Acque Industriali S.r.l.
Acque Industriali S.r.l., through the management of specific platforms, provides intermediation and liquid waste treatment services to private companies operating both regionally and nationally, as well as activities collateral to those of the integrated water cycle consisting mainly in the recovery and disposal of biological sludge.
The company carries designs and builds plants mainly related to the treatment of wastewater and sludge and waste in general, as well as the treatment of atmospheric emissions, following up with their subsequent ordinary and extraordinary management, as well as carrying out design, direction and execution of works in the field of environmental remediation of polluted sites, mainly in the industrial sector. It also performs research and development in the sectors of reference in partnership with research bodies at both a regional and national level.
Demap S.r.l. and Berg S.p.A.
Demap S.r.l., in which Acea acquired an equity interest of 90% on 4 July 2019 (“Demap”), carries out its activity in the field of sorting plastic packaging from urban waste collection. It is one of the 30 or so selection centres that have an agreement with the COREPLA consortium, responsible for achieving the recycling and recovery targets for plastic packaging of consumed products.
Separate collection of plastic packaging is regulated at a national level by a framework agreement between Anci and Conai and by the technical annexes concluded between Anci and the individual value chain consortia which, in the case of plastic packaging, provide that collection may be transferred to the sorting centre either selectively (mono-material collection) or jointly (multi-material collection). Demap carries out its business in compliance with current regulations and is authorised under Italian Legislative Decree 152/06 with procedure issued by the Province of Turin no. 133-25027/2010 of 23 June 2010.
In 2019, Demap regularly performed the services envisaged in the agreements entered into with COREPLA and with the multi-material suppliers. In 2019, a total of 60,804 tonnes of incoming goods were processed, an increase of approximately 2.7% compared to the previous year.
Berg S.p.A., in which Acea acquired an equity interest of 60% on 18 October 2019 (“Berg”), operates in the environmental services sector and in particular in the treatment of liquid and solid waste.
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Berg carries out is activities at the Frosinone plant, managing the storage and treatment of hazardous and non-hazardous liquid and solid waste. In 2019, the plant confirmed its structural solidity by completely processing the quantity authorised, i.e. 143,000 tonnes per year of liquid waste.
ENGINEERING AND SERVICES
The Engineering and Services business segment of the Group has a developed know-how in the design, construction and management of integrated water systems and develops research projects aimed to the technological innovation in the water, environmental and energy sectors. Particular importance is dedicated to laboratory services (analytical controls) and engineering consultancy.
In 2019, revenues from the Engineering and Services business segment amounted to Euro 75.9 million, with an increase of Euro 1.7 million (2.3 per cent.) compared to the previous year (Euro 74.2 million). The net profits on non-financial investments related to companies consolidated with the shareholders’ equity method amounted to Euro 3.0 million, with an increase of 0.7 million (30.4 per cent.) compared to the previous year.
The table below shows the contribution to revenues, operating and personnel costs, Income from equity investments and EBITDA of the Group’s Engineering and Services business segment for the financial years ended on 31 December 2019 and 31 December 2018.
Engineering and services Year ended 31 December 2019 2018 millions of euro Revenues 75.9 74.2 Costs 65.9 56.1 Income from equity investments 3.0 2.3 Gross Operating Profit (EBITDA) 13.0 20.4
Acea Engineering Laboratories Research Innovation S.p.A. ("Acea Elabori"), previously called LaboratoRI S.p.A., is ACEA’s wholly-owned subsidiary within the Group principally responsible for undertaking research and development projects. Acea Elabori provides engineering, laboratory, research and innovation services in the sectors of the water, waste and energy cycle, across all the areas of interest of the Group.
The activities carried out concern the various fields of technical-managerial interest, which include analytical checks on the integrated water and waste cycle, protection and optimisation of the use of water resources, design and construction of works for the integrated water service and for treatment – disposal – energy recovery from waste and for the production of hydroelectric and thermoelectric energy.
Laboratory activities
The laboratory offers analytical services on the various environmental matrices connected with the prescriptions dictated by relevant regulations.
In 2019, as part of the analytical activities carried out on water intended for human consumption, analytical services were performed on 12.359 samples and 455.071 analyses were carried out against the 451,365 analyses for 2018.
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With reference to the checks carried out for wastewater (sewage and treatment systems managed by Group Acea), 12,608 samples were analysed for a total of 251,132 analyses (10,719 samples and 179,197 analyses in 2018).
Engineering activity
Acea Elabori supplies engineering services to the companies in the Water Segment, in particular ACEA ATO 2 and ACEA ATO 5.
In recent years, the company has consolidated the development of engineering activities in other Energy Infrastructure and Environment Segments of Acea as well, with the design and direction of works for the valorisation of waste and the production of hydroelectric and thermoelectric energy and related "specialist and support" activities.
Also relevant is the company's commitment to the Environmental Impact Study drawn up on behalf of ACEA ATO 5 to obtain, through the EIA procedure, an environmental compatibility assessment of the upgrading and adaptation of the "La Moletta" purification plant in the Municipality of Veroli.
In 2019, the design of the remediation/extension of the water and sewerage networks on behalf of ACEA ATO 2 was also developed to support the activities planned under the single network maintenance contract.
Research and innovation activities
Acea Elabori carries out research and innovation in the water, environmental and energy sectors and develops technical consulting and applied research projects for the companies of the Acea Group, aimed at technological and digital innovation, process optimisation and recovery of materials and energy with a focus on the circular economy and sustainable management, also making use of framework agreements with the scientific community and national and EU funded programmes.
In 2019, such unit’s mission was revisited following the consolidation of the District Metering and Leak Search (internalised in April 2019 by ACEA ATO 2 and ACEA ATO 5) and the transfer of activities, now consolidated in the methodological application approaches (functional verification modelling and hydrogeological studies), which have become an integral part of the specialised services provided by Acea Elabori in the field of network and plant design.
Finally, the so called “ACEASMARTCOMP Project” was prepared with the invaluable support of the University of Tuscia and Enea, targeting the logic of the Waste Transition and proposing a new model of organic waste management, from large plants to diffuse waste management.
The development of the project, which will make the company organic waste free as early as 2020 and allow it to patent the system that will then be industrialised, has required extensive development and involved internal and external expertise from many different areas.
TWS offers a complete range of activities in the design, construction and management of plants for the management of integrated water service. In 2019, work continued on the construction contracts acquired on the market prior to TWS's entry into the Acea Group and at the same time the gradual implementation of works for the companies of the Group - specifically ACEA ATO 2.
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Intra-group activities constitute the new mission of TWS's business, as it can acquire orders from the market to an extent not exceeding 20%, in accordance with regulatory requirements.
Ingegnerie Toscane S.r.l. manages the conception and development of projects aimed at the completion of works, including the design, construction supervision and safety coordination. 2019 saw a strengthening of the traditional engineering services, which will presumably assume greater weight within the services provided by the company, also as a result of the greater investments of the companies managing the Integrated Water Service, which are the main clients of the works design.
OVERSEAS
The companies of the Overseas business segment of the Group provide integrated water services in Latin America (notably in Honduras, Dominican Republic, Colombia and Peru), with a customer base of approximately 4 million people. The activities of the Overseas segment are conducted with local and international partners, including through training of staff and transfer of expertise in favour of local entrepreneurs.
In 2019, revenues from the Overseas business segment amounted to Euro 47.3 million, with an increase of Euro 9.8 million (26.1 per cent.) compared to the previous year (Euro 37.5 million). The net profits on non-financial investments related to companies consolidated with the shareholders’ equity method amounted to Euro 1.1 million in line with the previous year.
The table below shows the contribution to revenues, operating and personnel costs, Income from equity investments and EBITDA of the Group’s Overseas business segment for the financial years ended on 31 December 2019 and 31 December 2018.
Overseas Year ended 31 December 2019 2018 millions of euro Revenues ...... 47.3 37.5 Costs ...... 31.5 23.8 Income from equity investments ...... 1.1 1.1 Gross Operating Profit (EBITDA) ...... 16.9 14.8
The Group operates in the Overseas business segment mainly through the following companies:
− Acea International S.A. an holding company substantially wholly-owned by the Issuer to which in April 2017 the Issuer transferred the shares of the following companies:
o Aguas de San Pedro S.A. (Honduras) ("Aguas de San Pedro"), which carries out its activity with respect to customers of San Pedro Sula. The Group holds 60.65% of the share capital of Aguas de San Pedro, which is fully consolidated.
o Acea Dominicana S.A. (Dominican Republic) ("Acea Dominicana"), which provides the service to the local municipality known as CAASD (Corporación del Acueducto y Alcantarillado de Santo Domingo). Acea Dominicana is wholly owned by Acea.
− Agua Azul Bogotà S.A. (Colombia), of which the Group holds 51% of the share capital and is consolidated on the basis of the equity method with effect from the 2016 financial
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statements as a result of a change in the composition of the Board of Directors. . The company is currently in liquidation.
− Consorcio Servicio Sur controlled by Acea International S.A. (50%), ACEA ATO 2 (1%) and by local partners Conhydra, Valio and India (total 49%). The Consorcio was established on 5 July 2018 with the specific aim of managing the corrective maintenance service for the drinking water and sewerage systems of the Directorate of Services Sur of Lima (Peru).
− Consorcio Agua Azul S.A. (Peru) ("Consorcio Agua Azul"), which provides water and sewerage services in the city of Lima. The Group held 25.5% of the share capital of Consorcio Agua Azul. On 13 January 2020, the Group acquired additional shares in the company from the outgoing shareholder Impregilo International Infrastructures N.V. As a result, the Group’s shareholding in Consorcio Agua Azul increased from 25.5% to 44.0%.
− Acea Perù (Peru), which is wholly owned by Acea International S.A., was established on 28 June 2018, in order to take development opportunities in Peru. From December 2019, the company is operating in the north area of Lima for an emergency situation in the maintenance of water supply.
STRATEGY
On 2 April 2019, the Board of Directors of Acea approved the 2019-2022 Business Plan which was published on its website along with a press release summarising the main elements of such Plan. The 2019-2022 Business Plan maintains the four key pillars that the Board of Directors of Acea identified in the previous business plan (i.e. (i) industrial growth, (ii) local focus & sustainability, (iii) technology innovation and quality, and (iv) operational efficiency) but now focuses on five specific actions: - accelerating the Group’s growth; - developing and diversifying the business portfolio; - concentrating on the innovation of the industrial processes; - reaching the targeted results; and - applying a dynamic and sustainable approach. In particular, the 2019-2022 Business Plan provides the following actions for each business area.
Water Acea intends to continue safeguarding water resources by enhancing the quality and efficiency of the service offered in the areas where it operates through major interventions such as: the installation of smart water meters, the reduction of grid leaks, the rationalisation of purification plants and their automation, the division of the grid into districts, the improvement of technical quality indicators and the safety enhancement of the water supply.
Energy Infrastructures Acea intends to develop projects enabling system decarbonisation, such as the technological evolution of the grid with the installation of second-generation smart meters, increased
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investments to enhance grid resilience, the laying of fibre optics for its infrastructure and the advanced automation of the grid. Moreover, insofar as concerns green energy generation, Acea plans to consolidate its position by developing a portfolio of at least 150 MW of photovoltaic energy via the construction of new facilities and purchases from the secondary market.
Commercial and Trading
The actions envisaged in the 2019-2022 Business Plan will be focused mainly on marketing by using, inter alia, digital channels and the optimisation of operating processes, with consequent reduction in the "Cost To Serve" and "Cost To Credit" as compared to the current situation. Moreover, additional value will be generated by the development of smart services (e.g. smart meters, insurance, domestic thermal systems). This growth will take place within a commercial scenario made more competitive and challenging by the full liberalisation of the electricity market starting from 2020, which will provide an opportunity for Acea to enhance and consolidate its position in the sector.
Environment
Acea’s development will focus on strengthening the waste treatment cycle with the aim to become a major operator in the treatment and recycling of paper and plastic.
Additional Strategic Opportunities
Acea intendeds to take advantage of certain strategic initiatives that can further strengthen the Group’s position. The strategic initiatives identified, achievable by 2022, are consistent with the Group’s business areas and with the main trends in the applicable market:
- growth in the natural gas distribution market via the evaluation of potential operator acquisition transactions and participation in future Ambito calls for tenders; - development of projects in connection with "smart energy efficiency" through the acquisition of ESCO and the launch of pilot projects in the areas of cogeneration/trigeneration and thermal insulation; - acceleration of the expansion of facilities, in the environment sector, also via possible strategic partnerships within the scope of sector consolidation; - acquisition of new customers by evaluating opportunities associated with market consolidation; - acceleration of the growth in renewables, with particular attention to the photovoltaic sector; and potential opportunities concerning the consolidation of water service operators within the applicable territories (for example, Tuscany and Umbria).
CORPORATE GOVERNANCE OF THE ISSUER
The corporate governance rules for Italian companies whose shares are listed on the Italian Stock Exchange are set forth in the Italian Civil Code, in Legislative Decree No. 58 of 24 February 1998, as subsequently amended (Testo Unico della Finanza) (the "Consolidated Financial Act") and in the relevant CONSOB implementing regulations.
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ACEA’s corporate governance is implemented in accordance with Italian legal requirements and best practice, and is compliant with the model recommended by the Corporate Governance Code (Codice di Autodisciplina) originally approved in March 2006 by the Corporate Governance Committee of the Italian Stock Exchange, as subsequently amended and supplemented.
ACEA has adopted a "traditional" corporate governance system consisting of the shareholders’ meeting, the board of directors and the board of statutory auditors.
The auditing of ACEA’s financial statements is undertaken by an independent auditing firm enrolled with the specific register provided by the law (for further details, please see "General Information – Auditors" below).
Board of Directors
Pursuant to Article 15 of the Issuer’s by-laws, ACEA’s board of directors (the "Board of Directors") shall consist of a minimum of five and a maximum of nine members, who shall remain in office for a period of no longer than three years, after which they may be re-elected.
ACEA’s by-laws provide for a voting list system for the appointment of all members of the Board of Directors8.
The current members of the Board of Directors were appointed at the ordinary shareholders’ meeting held on 29 May 2020 and will remain in office until the ordinary shareholders’ meeting to be called to approve the financial statements of ACEA as of and for the year ending 31 December 2022.
The Board of Directors is currently composed of nine members, seven of whom are independent in accordance with applicable law, ACEA’s by-laws and the Corporate Governance Code.
The Board of Directors has a key role in the organisational structure of ACEA and the Group as it is the body which defines the strategic objectives of the Group and monitors their implementation and progress. It is vested with all the powers provided by law and the Issuer’s by-laws, including powers of ordinary and extraordinary administration.
Name Position Date elected Michaela Castelli Chairman 29 May 2020 Giuseppe Gola Chief Executive Officer 29 May 2020 Giacomo Larocca Director 29 May 2020 Gabriella Chiellino Director 29 May 2020
8 The voting lists shall be submitted at least twenty or fifteen days, respectively, before the date set for the first annual meeting of the Board of Directors by the exiting directors or by the shareholders who alone or together with other shareholders, represent at least one per cent of the shares entitled to vote at the ordinary general meeting. No person can be a candidate in more than one list and each shareholder has the right to vote for only one list. The appointment shall proceed as follows: (i) half plus one of the directors shall be elected from the list that obtains the majority of votes; and (ii) the remaining directors shall be elected from the other lists.
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Name Position Date elected Liliana Godino Director 29 May 2020 Alessandro Caltagirone Director 29 May 2020 Diane Galbe Director 29 May 2020 Giovanni Giani Director 29 May 2020 Massimiliano Capece Minutolo del Director 29 May 2020 Sasso
The business address of each of the members of the Board of Directors is the registered office of ACEA at Piazzale Ostiense, 2, 00154 Rome, Italy.
Other offices held by members of the Board of Directors
The principal business activities and other directorships, if any, of each of the members of the Board of Directors outside the Group are summarised below.
Name Position Company/organization Michaela Castelli Chairman Nexi S.p.A. Chairman SEA S.p.A. Board Member Recordati S.p.A. Board Member La Doria S.p.A.. Statutory Auditor Autogrill Italia S.p.A. Giuseppe Gola None None Giacomo Larocca Head of Planning and Sace BT S.p.A. Management Control Gabriella Chiellino Chairman eAmbiente Chairman eEnergia Chairman e3city Board Member Ambienthesis S.p.A. Liliana Godino Chief Procurement Officer Gruppo Messina S.p.A. Alessandro Caltagirone Deputy Chairman Alborg Portland Holding A/S Deputy Chairman Cementir Holding N.V. Board Member Caltagirone Editore S.p.A. Board Member Caltagirone S.p.A. Board Member Il Messaggero S.p.A. Board Member Il Gazzettino S.p.A. Board Member Globocem A.S. Board Member Cementir Espana A.S. Board Member Alborg Portland Espana SL Chairman Yapitek Yapi Teknolojisi San. Ve Tic. A.S. Chairman Fincal S.A. Chairman Ical S.p.A. Board Member Vianini Lavori S.p.A. Sole Director Corso 2009 S.r.l. Sole Director Finanziaria Italia 2005 S.p.A. Board Member Società per lo Sviluppo Urbano S.p.A. Mamber of the Investment Fabrica Immobiliare SGR S.p.A. Committee Diane Galbe Senior Executive VP Group Suez S.A. - Business Unit Smart & Environmental Solutions. Head of Strategy Suez S.A.
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Name Position Company/organization Giovanni Giani Senior Advisor to the CEO Gruppo Suez S.A. Massimiliano Capece Chairman ICAL 2 S.p.A. Minutolo Chairman Società per lo Sviluppo Urbano S.p.A. Chairman Domus Roma 15 , S.r.l Chairman Domus Italia S.p.A. Board Member Immobiliare Caltagirone S.p.A. Board Member Vianini S.p.A. Board Member Piemme S.p.a. Sole Director Porto Torre S.p.A. Sole Director Energia S.p.A. Sole Director Imprese Tipografiche Venete S.r.l.
Internal committees of the Board of Directors
In accordance with the Corporate Governance Code, the Board of Directors has established the following internal committees:
(i) the Appointments and Compensation Committee (composed of Massimiliano Capece Minutolo (Chairman), Gabriella Chiellino, Liliana Godino and Giovanni Giani);
(ii) the Risks and Control Committee (composed of Liliana Godino (Chairman), Giovanni Giani, Giacomo Larocca and Massimiliano Capece Minutolo del Sasso);
(iii) the Ethics and Sustainability Committee (composed of Gabriella Chiellino (Chairman), Massimiliano Capece Minutolo Del Sasso, Giacomo Larocca and Giovanni Giani); and
(iv) the Related Party Committee (composed of Liliana Godino (Coordinator), Massimiliano Capece Minutolo Del Sasso and Giovanni Giani.).
In addition, on 29 May 2020, the Board of Directors established an Executive Committee pursuant to article 2381 of the Italian Civil Code and article 20, paragraph 1, of the Company’s by-laws, composed of Giovanni Giani (Chairman), Giuseppe Gola, Massimiliano Capece Minutolo Del Sasso and Michaela Castelli. The Executive Committee will deal with matters pertaining to sponsorships and institutional relations.
Officers
The table below sets forth ACEA’s current executive officers who, except for Mr. Giuseppe Gola, are not members of the Board of Directors (together with their role and their respective departments) at the date of this Base Prospectus.
Name Position Area Giuseppe Gola Chief Executive Officer Business development, production and overseas strategies Fabio Paris Executive Administration, finance and control Antonio Sanna Executive Legal and corporate affairs Elvira Angrisani Executive Investor Relations Tiziana Flaviani Executive Communications Claudio Mancini Executive Human Resources
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Name Position Area Massimiliani Garri Executive Technology & Solutions Giovanni Papaleo Executive Chief Operating Office Valerio Marra Executive Sales and Trading
Board of Statutory Auditors
Pursuant to Article 22 of Acea’s by-laws, Acea’s board of statutory auditors (the "Board of Statutory Auditors") is composed of three statutory auditors and two alternate auditors. Acea’s by-laws provide for a voting list system for the appointment of all members of the Board of Statutory Auditors. The members of the Board of Statutory Auditors shall be appointed according to provisions of Article 15 of Acea’s By-laws concerning the appointment of the Board of Directors. The appointment procedure is as follows: (i) half plus one of the Statutory Auditors and one Alternate Statutory Auditor shall be elected from the list that obtains the majority of votes; and (ii) the remaining members shall be elected from the minority lists. The Shareholders’ Meeting shall appoint the Chairman. The Board of Statutory Auditors is vested with the supervision and control powers provided by applicable law, by the Issuer’s by-laws and by the Corporate Governance Code. The current members of the Board of Statutory Auditors were appointed by the ordinary shareholders’ meeting held on 17 April 2019 and will remain in office until the ordinary shareholders’ meeting to be called to approve the financial statements of the Issuer as of and for the year ending 31 December 2021. The Board of Statutory Auditors of Acea is currently composed of the following members:
Name Position Maurizio Lauri Chairman Pina Murè Statutory Auditor Maria Francesca Talamonti Statutory Auditor Maria Federica Izzo Alternate Auditor Mario Venezia Alternate Auditor The business address of each of the members of the Board of Statutory Auditors is Piazzale Ostiense, 2, 00154 Rome, Italy.
Other offices held by members of the Board Statutory Auditors
The principal business activities and other directorships, if any, of each of the members of the Board of Statutory Auditors outside the Group are summarised below.
Name Position/office Company / organization Maurizio Lauri Statutory Auditor Tirreno Power S.p.A. Statutory Auditor GEDI Gruppo Editoriale S.p.A. Statutory Auditor Officine CST S.p.A Statutory Auditor Fondazione Roma Europa Festival Sole Auditor RSM Italy Accounting Roma S.r.l. Director RSM Italy Scarl Vice Chairman of the Board IMEVA S.p.A. of Directors Chairman of the Board of Banca Immobiliare (BIM) S.p.A. Directors
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Name Position/office Company / organization Auditor Accademia Americana in Roma Director RSM Studio Palea Lauri Gerla Holding S.r.l. Member of the European Audit Committee Leadership Group del Tapestry Network Pina Murè Directors Istituto di Cultura Bancaria Maria Francesca Chairman of the Board of BasicNet S.p.A. (BasicNet Group) Talamonti Statutory Auditors Chairman of the Board of Servizi Aerei S.p.A. (ENI Group) Statutory Auditors Statutory Auditor Costiero Gas Livorno S.p.A. (ENI Group) Statutory Auditor DigiTouch S.p.A. Member of the Board of FIN-Federazione Italiana Nuoto Statutory Auditor Statutory Auditor Musinet Engineering S.p.A. Statutory Auditor PLC S.p.A. Statutory Auditor PS Parchi S.p.A. Statutory Auditor Raffineria di Milazzo S.c.p.A. (Gruppo ENI/Q8) Statutory Auditor Rainbow Magicland S.p.A. Independent Director Elettra Investimenti S.p.A. Sole Director Bramito SPV S.r.l. Sole Director Convento SPV S.r.l. Sole Director New Levante SPV S.r.l. Sole Director Ponente SPV S.r.l. Sole Director Vette SPV S.r.l. Maria Federica Izzo Chairman of the Board of ASD LUISS Associazione Sportiva Luiss – Statutory Auditors Società sportive dilettantistica Statutory Auditor SIA BLU S.p.A. Alternate Auditor Gamenet Group S.p.A. Alternate Auditor Gamenet Entertainment S.r.l. Alternate Auditor Billions Italia S.r.l. Alternate Auditor Gnetwork S.r.l. Alternate Auditor Intralot Holding & Services S.p.A. Alternate Auditor Intralot Gaming Machines S.p.A. Alternate Auditor Intralot Italia S.p.a. Mario Venezia Statutory Auditor YAMA S.p.A. Statutory Auditor Imperia & Monferrina S.p.A. Statutory Auditor Daikin Applied Europe S.p.A. Sole Auditor Aut. Portugal Statutory Auditor Aut. Dell’Atlantico S.p.A. Statutory Auditor Aut. Tangenziale Napoli Statutory Auditor Eurallumina S.p.A. Statutory Auditor Eurallenergy S.p.A.
Potential conflicts of interest
As at the date of this Base Prospectus, no member of the Board of Directors or the Board of Statutory Auditors has declared a private interest or has any other duties which constitute an
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actual or a potential conflict of interest of such member with respect to his duties to the Issuer or which could be material in the context of the issue of the Notes.
SHARE CAPITAL
As at 31 March 2020, Acea has an authorised, issued and fully paid-up share capital of Euro 1,098,898,884, consisting of 212,964,900 ordinary shares with a par value of Euro 5.16 each. Each ordinary share carries one voting right at the shareholders’ meeting, save for 416,993 treasury shares, representing 0.2 per cent. of Acea’s share capital, in respect of which the relevant voting rights have been suspended.
Pursuant to Article 6, paragraph 1 of the Issuer’s by-laws, shareholders other than the Municipality of Rome, or its subsidiaries, which hold equity investments in excess of 8 per cent. of the share capital, may not exercise their voting rights in respect of any shares exceeding such threshold.
ACEA has not issued any other categories of shares or any financial instruments convertible into or exchangeable into ordinary shares.
There are no outstanding stock option or stock grant plans which require share capital increases.
MATERIAL SHAREHOLDERS As at 10 June 2020, the shareholders which owned, directly or indirectly, a shareholding exceeding 3 per cent. of ACEA’s voting capital were the following:
Percentage of Percentage of the voting the ordinary Declarant or party at Party directly holding the major shareholding share capital share capital the top of the investment chain Name Type of Possession % % SUEZ ITALIA SPA Beneficial ownership 12.483 12.483 Total 12.483 12.483 SUEZ SA Beneficial ownership 10.850 10.850 SUEZ SA Total 10.850 10.850 Total 23.333 23.333
ROMA CAPITALE ROMA CAPITALE Beneficial ownership 51.000 51.000 Total 51.000 51.000 Total 51.000 51.000 CAPITOLIUM SRL Beneficial ownership 0.141 0.141 Total 0.141 0.141 CALTAGIRONE SPA Beneficial ownership 1.174 1.174 Total 1.174 1.174 CALTAGIRONE FINCAL SPA Beneficial ownership 3.052 3.052 FRANCESCO Total 3.052 3.052 GAETANO FGC SPA Beneficial ownership 1.085 1.085 Total 1.085 1.085 Total 5.452 5.452
Source: Consob
The Issuer’s controlling shareholder is Roma Capitale (the Municipality of Rome). As at the date of this Base Prospectus, to the knowledge of the Issuer there is no shareholders’ agreement among the Issuer’s shareholders.
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LITIGATION
The aggregate volume of pending litigation in which one or more companies of the Group are involved is relatively small, both in terms of number of cases (less than one thousand) and of economic risk associated therewith. In order to address the financial impact of such litigation, ACEA appropriate provisioning in its financial statements. See also "Risk Factors – Legal and internal control risks – Risks related to legal and tax proceedings and the potential violation of laws and regulations.".
Below is a summary of the main legal proceedings in which the Group is currently involved.
ACEA ATO 2 – Seizure of waste treatment plants
A notification of conclusion of the preliminary investigations was filed on 22 April 2016 in respect of the pending procedure concerning the seizure of the Roma Est waste treatment plant, with some managers and directors of the Issuer and the Issuer itself being placed under investigation under Legislative Decree 231/2001. The waste treatment plants of Roma Nord and Colubro are still under seizure, whereas the Palestrina Carchitti plant was temporarily released in order to restart the operations and assess the functioning of the sewage process.
In addition, at the beginning of 2017 the "Botticelli" waste treatment plant was placed under seizure as a result of the revocation of the relevant discharge authorization by the municipality of Rome, although ACEA ATO 2 retains the right to use the plant, subject to the execution of certain activities. ACEA ATO 2 duly performed the activities requested by the municipality of Rome; however, it decided to challenge the revocation of the discharge authorization. As of the date of this Base Prospectus, the first hearing is still to be scheduled. The Botticelli treatment plant was subject to disruption following the commissioning of the new plant called Botticelli 2 and a request for revocation of the seizure was subsequently filed.
With reference to the problem of seizures of wastewater treatment plants, the plants in Roma Nord and Botticelli were released on 13 May 2019 and 20 May 2019, respectively.
As far as the Colubro treatment plant is concerned, following a request made by ACEA ATO 2, the Judicial Authority granted temporary release from seizure of the aforementioned plant in order to get it up and running and to carry out the consequent verification of the purification process.
With regard to the Carchitti treatment plant, the temporary release from seizure granted by the Authority remains in effect.
ACEA ATO 2 - Regulation of the hydrometric level of the Lake of Bracciano
The Orders issued by the Director of the Regional Directorate of Water Resources and Protection of the Soil No. 0375916 of 20 July 2017 and No. 0392583 of 28 July 2017, concerning the Regulation of the hydrometric level of the Lake of Bracciano, were both challenged by ACEA ATO 2 before the Superior Court of Public Waters (Tribunale Superiore Acque Pubbliche – "TSAP") with separate petitions, then united by ruling No. 44/2017.
On 24 January 2018, at the hearing held before the Investigating Judge, ACEA ATO 2 requested the discontinuance of the matter at issue, in consideration of the subsequent regional measures adopted by Resolution of the Regional Director of Water Resources and Protection of the Soil No. G18901 of 29 December 2017 concerning the use of the basin of Lake of
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Bracciano as strategic drinking water reserve. An appeal has been filed against Resolution No. G18901 before the TSAP. Regarding the first two Orders, the TSAP finally declared the impossibility to proceed with the appeal due to supervening lack of interest. Regarding the last Resolution No. G18901, the next panel hearing has been set as of 3 July 2019.
With a ruling of 6 August 2019, the Superior Court of Public Waters rejected the appeal brought by Acea, while pointing out that it cannot be prevented from carrying out temporary and controlled withdrawals from the lake, strictly related to the carrying out of conservative maintenance actions aimed at minimising the risks of water potability. In October 2019, ACEA ATO 2 appealed to the United Sections of the Supreme Court of Cassation in order to protect the concession. Currently we are awaiting the scheduling of the hearing.
ACEA ATO 2 – Failure to repair a sewerage system
In June 2019, the company Parco dell’Aniene S.c.a.r.l. sued ACEA ATO 2 and Roma Capitale for alleged liability of the defendants, jointly and severally or to the extent to which they are responsible, for alleged wrongful acts arising from the failure to build and/or repair the sewerage system prior to the construction works carried out by the claimant in the Tor Cervara - Via Melibeo area. The consortium is making an exorbitant claim for compensation, totalling more than € 105 million. The judgement is currently pending before the Court of Rome and the first hearing was postponed to 7 October 2020 to allow the summons of the third parties involved. The claim appears to be exaggerated and probably even of doubtful foundation.
ACEA ATO 5 – Termination of the concession agreement
With appeal No. 316/2016 ACEA ATO 5 challenged Resolution No. 2 of the Conference of Mayors of 18 February 2016, which gave effect to the procedure for the contractual termination of the concession agreement with a notice being submitted to the company in March 2016. It also challenged Resolution No. 7 of 13 December 2016, which also resolved upon the contractual termination of the concession agreement, and submitted additional reasons for appeal No. 316 and at the same time requested compensation for damage.
On 27 December 2017, the regional administrative court of Latina upheld the petition brought by the ACEA ATO 5 and cancelled the challenged resolution. Terms for appeal to the Council of State are currently pending.
On 26-27 June 2018 the AATO5, the Municipality of Ceccano and other Municipalities of ATO 5 served the appeals, challenging the aforementioned ruling no. 638/2017 of the Lazio Regional Administrative Court - Latina section. ACEA ATO 5 filed the formal documents for both disputes, for which as of today there is no information regarding the scheduling of the hearing.
ACEA ATO 5 – Consorzio ASI
The injunction order undertaken by Consorzio ASI for the repayment of the portion of the treatment service carried out on behalf of ACEA ATO 5 (amounting to Euro 6,470.824.39) has been challenged by ACEA ATO 5. The next hearing for discussion has been scheduled for 25 June 2019, 22 November 2019 and subsequently to 31 March 2020 whilst the parties are currently negotiating the terms of an agreement to settle the dispute.
Acea RSE tax inspection and fiscal disputes
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On 14 June 2012, Acea RSE was delivered a Report on Findings from the Italian Financial Police – Rome Tax Police Department following its inspection to check the correct use of the tax suspension provisions under the VAT tax warehouse system pursuant to article 50-bis of Law Decree no. 331 of 30 August 1993 ("VAT Warehouses"), relating to certain assets imported by the company in 2009, 2010 and 2011.
Based on the alleged abusive use of the aforementioned system by the company, the inspectors charged the company with failure to pay VAT on imports – for 2009, 2010 and 2011 – amounting to Euro 16,198,714.87.
On 6 August 2012, Acea RSE submitted a defence brief pursuant to art. 12, paragraph 7, of Law no. 212 of 27 July 2000 concerning the findings contained in the aforementioned Report on Findings.
The issue relating to the concepts of simulated warehouses and the introduction of goods to the country is particularly well-known and debated, and has been the subject of numerous papers on practices issued by the Italian Customs Authority and several cases of legal intervention.
ACEA considers that all the factual and legal conditions envisaged in the regulation on the use of VAT Warehouses, as interpreted by the relevant administrative bodies, were fully satisfied and therefore the aforementioned Report on Findings is without grounds, also taking into account the following: as concerns the particular case of the provision of services for the assets held at the VAT Warehouses (case set forth in letter h) of art. 50-bis of Law Decree no. 331/1993), art. 34, paragraph 44 of Law Decree no. 179 of 18 October 2012, recently amended art. 16, paragraph 5-bis of Law Decree no. 185 of 29 November 2008 (on the authoritative interpretation of letter h) of art. 50-bis noted above) establishing, for that case, that VAT must be deemed definitively paid if, when the merchandise is taken from the VAT Warehouse for marketing within the country, the regulations set forth in paragraph 6 of art. 50-bis of Law Decree 331/93 are correctly implemented, or the reverse charge procedures pursuant to art. 17, paragraph 2, of Presidential Decree no. 633 of 26 October 1972 are correctly applied. Management believes that ACEA’s approach appears to be supported by Circular n. 16/D of 20 October 2014 issued by the Customs Agency following the decision of the Court of Justice of 17 July 2014 no. C-272/13.
Acea Servizi Acqua – Dispute over shareholders’ agreement
In Autumn 2011, the minority quotaholders of Acea Servizi Acqua S.r.l. (a joint venture in which ACEA owned an interest of 70 per cent., now the company has been liquidated and cancelled from the Companies’ Register) together with their respective shareholders, commenced proceedings for an amount of over Euro 10 million against ACEA, for alleged damages caused by ACEA’s failure to meet its obligations under the relevant shareholders’ agreement.
By judgment no. 17154/15 of 17 August 2015, the Court entirely dismissed the application and ordered the parties to jointly reimburse the costs (amounting to Euro 50,000), in addition to incidental expenses, to ACEA. On 1 October 2015 SMECO filed an appeal against such decision. The hearing to clarify the conclusions is scheduled for 3 November 2020.
Enel Green Power
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On 4 September 2014 Enel Green Power (EGP) issued proceedings against ACEA ATO 2 for the payment of the amounts due for the adjustment of the "subtention price" for the branching off, for hydroelectric and drinking purposes, of the "Le Capore" springs, quantified for the period 2009 - 2013 at approximately Euro 17 million (excluding VAT).
Such request was immediately rejected by the Issuer on the basis of the case law represented by the first instance decision of the Lazio regional water court (Tribunale Regionale delle Acque) taken on 3 May 2014 in respect of E.On.’s proceedings (please see subparagraph "E.On. Produzione S.p.A. – Dispute over indemnities for use of water" above) which raises similar issues.
As at the Date of this Base Prospectus, EGP has not served further proceedings against ACEA ATO 2, possibly because of the decision taken by the TSAP in the context of the E.ON Produzione/ERG Hydro proceedings.
Acea S.p.A. and Acea Ato 2 S.p.A. - CO.LA.RI.
On 23 June 2017, Consorzio Co.La.Ri. and E. Giovi S.r.l. – respectively the manager of the Malagrotta (RM) landfill and executive consortium member – filed a claim against the Issuer and ACEA ATO 2, requesting approximately €36 million as payment of the portion of landfill access tariffs, as established by Legislative Decree No. 36/2003, for the entire term of the agreement for the use of the landfill (i.e., 1985 – 2009). Alternatively, should the rules of Legislative Decree No. 36/2003 be deemed non-retroactive, the plaintiffs requested the payment of approximately €8 million as consideration for the period 2003 – 2009, as well as the payment of the amounts due for the period 1985 – 2003 as determined by experts appointed by court. The first hearing was scheduled for 8 October 2018, rescheduled for 28 March 2019, and then postponed until 12 November 2019. On that date, the judge set the hearing for conclusions on 27 October 2020.
ARETI – Dispute GALA S.p.A
In November 2015, ARETI, as electricity distribution grid manager, stipulated a transmission contract with the company GALA S.p.A., which operates on the market of electricity sales to end customers.
Starting from March 2017 GALA S.p.A. has suspended all payment of prices billed and due to ARETI and, on 3 April, submitted a request for agreements with creditors (concordato preventivo) pursuant to article 161, paragraph 6, of Italian Bankruptcy Law. On 7 April 2017 ARETI commenced the enforcement of part of the guarantees given by GALA S.p.A. On 1 June 2017, given the continuing serious breach of contract, ARETI notified the termination of the transmission agreement and the enforcement of the additional contractual guarantees.
On 3 May 2018 GALA S.p.A.’s shareholders’ meeting resolved upon the liquidation of the company, revoking the previous request for concordato preventivo.
The pending disputes generated by the complex matter are summarised below.
Precautionary measures
In response to the enforcement of the guarantees described above, on 12 April 2017 GALA S.p.A. filed a cautionary appeal as per Article 700 of the Italian Code of Civil Procedure against the collection on 12 April, obtaining a decree inaudita altera parte, which initially prevented
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ARETI from exercising its right to collect the guarantees. This decree was thereafter revoked by court order of 30 May 2017, which fully recognised the rights of ARETI.
On 1 June 2017, given the continuation of the serious breach of contract, ARETI notified the termination of the transport contract and also the collection of the additional contractual guarantees.
On 6 June, GALA S.p.A. appealed against the cautionary ordinance of 30 May and, again, on 9 June, submitted a second independent appeal for urgent measures before the Court of Rome, requesting a declaration of invalidity of the termination ordered on 1 June 2017 and initially obtaining the issuing of a decree inaudita altera parte in its favour.
On completion of both legal proceedings, the reasoning of ARETI was again completely recognised, with the issuing on 12 July 2017 of a board ordinance rejecting the appeal, following which the judge, called upon to decide on the second appeal as per Article 700 of the Italian Code of Civil Procedure, asked the parties not to appear at the hearing, declaring that the appeal could not continue by ordinance of 13 July 2017.
The first judgement filed by the guarantor Euroins Insurance plc and the injunction issued in favour of GSE S.p.A.
In July 2017, Euroins Insurance plc, guarantor of GALA S.p.A., independently introduced assessment proceedings requesting a declaration that its guarantee obligation was invalid; ARETI requested right from the first hearing of appearance of 28 December 2017 to have that judgement consolidated with the ordinary judgement of opposition to the injunction order of the GSE S.p.A.(see below), but this request has not yet been ordered by the judge. The next hearing set for October 2019.
GSE S.p.A., after notifying ARETI to pay the general system charges due by GALA S.p.A., even if it has not been paid, requested and obtained from the Court of Rome an injunction, not immediately enforceable, against ARETI for payment of part of these charges. The injunction was promptly opposed by ARETI with a writ of summons served to GSE S.p.A. and inscribed in the rolls in December 2017, with the simultaneous summons, as a guarantee, of GALA S.p.A. and its guarantors (China Taiping Insurance (UK) Co. Ltd and Insurance Company Nadejda), with the next hearing set for October 2019, within the judgement Areti paid the sums due to GSE S.p.A. in July 2018.
Both judgements are pending before Section XVII of the Court of Rome, the same designated judge, who set the hearing for the decision concerning the request for consolidation to be held on 5 July 2018. A postponement of the hearing to 25 November 2020 has been ordered.
GALA S.p.A.’s citation to ARETI, AE and ACEA
By means of a summons served in March 2018, GALA S.p.A. requested the Court of Rome to declare the invalidity of some clauses of the transport contract stipulated with ARETI in November 2015 and the consequent invalidity/ineffectiveness of the termination of the contract by ARETI, ordering the latter to pay the corresponding damage, for a total of about € 200,000,000.00.
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GALA S.p.A. also requested that the behaviour of ARETI and other defendant companies - ACEA and AE - be declared acts of unfair competition, condemning them to pay the corresponding damages.
The companies of the ACEA Group that were sued acted within the terms of the law, denying the opposing claims and requesting their rejection.
In addition, as a counter-claim, ARETI has requested to declare the contract legitimately terminated, as well as to ascertain and declare the non-fulfilment of GALA S.p.A. of the payment and guarantee obligations assumed under the transport contract with consequent order to pay the related amount, plus interest and without prejudice to the additional amounts being accrued.
The judgement is currently pending before the 17th civil section of the Court of Rome and on 5 November 2018 the designated judge assigned to the parties the terms for the presentation of their briefs pursuant to Article 183, paragraph 6 of the Italian Code of Civil Procedure starting from 9 December 2018 and set the hearing for 12 May 2021 for the clarification of the conclusions, without prejudice to any preliminary investigation to be carried out. By decree of 13 June 2019, the Investigating Judge ordered an official technical consultancy. The expert operations started on 17 September 2019 and are still ongoing.
Appeal for Cassation against sentence no. 5619/2017 of the Council of State on System Charges.
It should also be noted that with sentence no. 5619/2017, the Council of State pronounced itself on general system charges, general ARERA regulation and traders’ obligations; this sentence was challenged by ARETI with recourse to the United Sections of the Supreme Court of Cassation in January 2018, pursuant to Articles 111, paragraph 8 of the Italian Constitution, 362 and 382 of the Italian Code of Civil Procedure and 110 of the Italian Code of Administrative Procedure, for overriding the jurisdictional function.
By order of 29 November 2019, the Supreme Court declared the action brought by ARETI to be inadmissible due to lack of capacity to sue.
EMPLOYEES
As at 31 December 2019, the Group had 7,576 employees, with an increase compared with the previous year as at 31 December 2018 (1,042 employees).
MATERIAL CONTRACTS
Debt issuances
On 3 March 2010, ACEA issued the JPY 20,000,000,000 2.5 per cent. Notes due 2025 (ISIN Code XS0490440384).
On 16 March 2010, ACEA issued the Euro 500,000,000 4.500 per cent. Notes due 2020 (ISIN Code XS0495012428) (the "2020 Notes"). The 2020 Notes were subject to a tender offer in the context of a liability management transaction in October 2016 and the outstanding amount has reimbursed on the due date of 16 March 2020.
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On 15 May 2014, ACEA established the Euro 1,500,000,000 Euro Medium Term Notes Programme to which this Base Prospectus relates.
On 15 July 2014, ACEA issued Euro 600,000,000 2.625 per cent. Notes due 2024 (ISIN Code XS1087831688) under the Programme.
On 24 October 2016, ACEA completed a liability management transaction involving a tender offer of existing notes and a new issue of Euro 500,000,000 1.000 per cent. Notes due 2026 (ISIN Code XS1508912646) under the Programme.
On 19 January 2018, ACEA increased the maximum aggregate principal amount of Notes outstanding and guaranteed at any one time under the Programme from Euro 1,500,000,000 to Euro 3,000,000,000.
On 1 February 2018, ACEA issued Euro 300,000,000 three-month EURIBOR plus 0.37 per cent. Floating Rate Notes due 2023 (ISIN Code XS1767087940) and Euro 700,000,000 1.500 per cent. Notes due 2027 (ISIN Code XS1767087866) under the Programme.
On 6 May 2019, ACEA increased the maximum aggregate principal amount of Notes outstanding and guaranteed at any one time under the Programme from Euro 3,000,000,000 to Euro 4,000,000,000.
On 23 May 2019, ACEA issued Euro 500,000,000 1.750 per cent. fixed rate notes due 2028 (ISIN Code XS2001278899) under the Programme.
On 6 February 2020, ACEA issued Euro 500,000,000 0.5000 per cent. fixed rate notes due 2029 (ISIN Code XS2113700921) under the Programme.
Main Long Term Financing Agreements and back-up facilities
On 11 November 2005, Cassa Depositi e Prestiti granted to ARETI a Euro 439,333,798.96 amortising loan guaranteed by ACEA maturing on 31 December 2027.
On 31 March 2008, Cassa Depositi e Prestiti granted an unsecured Euro 100,000,000 amortizing loan maturing on 21 December 2021 to ACEA.
On 25 August 2008, the European Investment Bank granted to the Issuer a Euro 200,000,000 unsecured loan comprising two tranches: a Euro 150,000,000 amortising loan maturing on 15 June 2023 and Euro a 50,000,000 bullet fully prepaid on 15 March 2018.
On 23 December 2014, the European Investment Bank granted to the Issuer a Euro 200,000,000 amortising unsecured loan maturing on 17 June 2030.
On 4 August 2015, the European Investment Bank granted to the Issuer a Euro 200,000,000 unsecured loan with a three-year availability period. On 2 May 2017 the Issuer requested the total disbursement of the loan with an amortizing repayment maturing on 15 December 2030.
On 18 July 2019, a pool of banks granted to Gori a Euro 80,000,000 project financing amortizing loan outstanding for Euro 11,403,000 as of 31 December 2019, maturing on 31 December 2029.
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On October 2019, the Issuer fully consolidates Acquedotto del Fiora project financing amortizing loan granted by a pool of banks, outstanding for Euro 125,111,000 as of 31 December 2019, maturing on 31 December 2029 with limited recourse on the Issuer.
On 4 April 2020, UBI Banca S.p.A. granted to the Issuer a Euro 100,000,000 unsecured bullet loan maturing on 4 April 2022.On 1 July 2020, Banca Nazionale del Lavoro S.p.A. granted to the Issuer a Euro 150,000,000 unsecured committed revolving credit facility, maturing 30 June 2023. The facility is undrown at the date of this Base Prospectus.
ACEA’s loans and ACEA’s subsidiaries’ principal medium/long–term borrowings, including the above-mentioned loan to ARETI, may be subject to covenants to be complied with by the borrower in accordance with international market practices and/or European Investment Bank standards.
The loan agreements entered into by ACEA contain broadly market standard (LMA and/or EIB) provisions.
RECENT DEVELOPMENTS
Issuance of €500,000 0.500 per. cent fixed rate notes due 2029 under the Programme On 6 February 2020, Acea issued fixed rate notes under the Programme, for a total principal amount of €500 million having a fixed rate of 0.500% per annum, with a maturity date falling on 6 April 2029, an issue price of 99.2% and a yield of 0.590% (the “2029 Notes”). The 2029 Notes were admitted to trading on the regulated market of, and listed on the official list of, the Luxembourg Stock Exchange.
Acquisition of majority equity holdings in Ferrocart S.r.l. and Cavallari S.r.l. On 19 February 2020, Acea entered into an agreement for the acquisition of an equity holding of 60%, respectively, of the share capital of Ferrocart S.r.l. (“Ferrocart”) and Cavallari S.r.l. (“Cavallari”) (which owns 100% of Multigreen S.r.l. (“Multigreen”)), active in the storage, treatment and selection of waste. The companies Ferrocart, Cavallari and Multigreen, which together own four plants with a total authorised capacity of more than 145 thousand tonnes per year, operate in the provinces of Terni and Ancona, performing activities pertaining to the selection and recovery of paper, iron, wood, plastic and metals. They are also active in the management of differentiated production and packaging refuse collection as well as the disposal of waste, mostly on behalf of Corepla (“National Consortium for the Collection, Recycling and Recovery of Plastic Packages”). Based on 100% of the enterprise value of Ferrocart and Cavallari, the transaction has an economic value of Euro 25 million. Ferrocart and Cavallari have been fully consolidated by Acea from 22 April 2020.
Acquisition of majority equity holding in Bersolar S.r.l. On 28 February 2020, Acea entered into an agreement for the purchase of an equity holding of 100% of the share capital of Bersolar S.r.l. (“Bersolar”), a company that produces energy from photovoltaic plants. Bersolar owns an operational ground-mounted solar asset, located in Riva Presso Chieri (TO), with an installed capacity of 0.994 MWp. The asset benefits from feed-in- tariff contracts with Gestore dei Servizi Energetici, which are remunerated under the “Secondo Conto Energia” incentive scheme, guaranteeing stable revenue streams.
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Based on 100% of the enterprise value of Bersolar, the transaction has an economic value of Euro 3.2 million.
Acquisition of a majority equity holding in Alto Sangro Distribuzione Gas S.r.l. On 10 March 2020, Acea entered into an agreement with Alma C.I.S. S.r.l. and Mediterranea Energia Soc. Cons.a.r.l. for the acquisition of an equity holding of 51% of the share capital of Alto Sangro Distribuzione Gas S.r.l. (“Alto Sangro”), a company which operates in the distribution of methane gas and present in twenty-four municipalities within the province of Aquila. The two selling companies will retain the residual 49% of Alto Sangro share capital and, in synergy with Acea, will participate in the infrastructure’s industrial management of Alto Sangro. Based on 100% of the enterprise value of Alto Sangro, the transaction has an economic value of Euro 40 million. Following the finalization of the transaction, expected by July 2020, Alto Sangro will be fully consolidated by Acea.
Acquisition of majority equity holding in Simam S.p.A. On 8 April 2020, Acea entered into an agreement for the purchase of an equity holding of 70% of the share capital of Simam S.p.A. (Servizi Industriali Manageriali Ambientali) (“Simam”), a leading company in the engineering, construction and management of water and waste treatment facilities, and in environmental interventions and remediation, with high-tech global services. Based on 100% of the enterprise value of Simam, the transaction has an economic value of Euro 30 million. Simam has been fully consolidated by Acea from 7 May 2020. The sale and purchase agreement provides for the possibility to purchase additional shares up to 100% of the Simam’s share capital, starting from 2023.
Acquisition of majority equity holding in Fergas Solar S.r.l. On 15 April 2020, Acea entered into an agreement for the purchase of an equity holding of 100% of the share capital of Fergas Solar S.r.l. (“Fergas Solar”). Fergas Solar owns a single authorisation (that includes also the high voltage connection works) for the construction of a photovoltaic plant within the Municipality of Ferrandina (MT), with a maximum installed capacity of 19.9 MWp. Based on 100% of the enterprise value of Fergas Solar, the transaction has an economic value of Euro 2 million.
Acquisition of majority equity holding in Euroline 3 S.r.l. On 7 May 2020, Acea entered into an agreement for the purchase of an equity holding of 100% of the share capital of Euroline 3 S.r.l. (“Euroline 3”), a company that produces energy from photovoltaic plants. Euroline 3 owns an operational ground-mounted solar asset, located in Cassano delle Murge (BA), with an installed capacity of 0.996 MWp. The asset benefits from feed-in-tariff contracts with Gestore dei Servizi Energetici, which are remunerated under the “Quarto Conto Energia” incentive scheme, guaranteeing stable revenue streams. Based on 100% of the enterprise value of Euroline 3, the transaction has an economic value of Euro 2.1 million.
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Acquisition of the entire share capital in Electric Drive Italia S.r.l. On 7 May 2020, Acea entered into an agreement for the purchase of an equity interest of 100% of the share capital of EDI S.r.l. (Servizi Electric Drive Italia S.r.l.) (“EDI”), an innovative start-up born in 2014 that promotes the development of electric mobility through advanced IT and organizational solutions. Managers who have over twenty years of experience in two distinct areas (energy and ICT solutions) run such company: Based on 100% of the enterprise value of EDI, the transaction has an economic value of Euro 1.5 million. EDI has been fully consolidated by Acea from 19 May 2020.
Fitch Rating On 12 May 2020, Fitch Ratings confirmed the Acea’s Long-Term Issuer Default Rating (IDR) at 'BBB+' with ‘Stable’ Outlook and Short-Term IDR at 'F2’, despite the recent “downgrading of Italy’s sovereign debt rating”. The Long-Term Senior Unsecured Rating has also been affirmed at ‘BBB+’. The affirmation reflects Acea’s strategic focus on regulated businesses, its enhancement of positive operational performance and the good level of liquidity available.
Acquisition of majority equity holding in Energia S.p.A. On 27 May 2020, Acea entered into an agreement with ICAL S.p.A. and FCG S.p.A. for the acquisition of an equity stake of 49.9% of the share capital of Energia S.p.A. (“Energia”), a company that produces energy from photovoltaic plants. Energia owns two operational ground- mounted solar assets (in Spoleto and Nepi) with a total installed capacity of 7.7 MWp. The Spoleto plant, located in Spoleto (PG), has an installed capacity of 3.2 MWp and the Nepi plant, located in Nepi (VT), has an installed capacity of 4.4 MWp. The assets benefit from feed-in-tariff contracts with Gestore dei Servizi Energetici, which are remunerated under the “Quarto Conto Energia” incentive scheme, guaranteeing stable revenue streams. Based on 100% of the enterprise value of Energia, the transaction has an economic value of Euro 25 million. Acquisition of majority equity holdings in PF Power of Future S.r.l. and IFV-ENERGYS S.r.l. On 4 June 2020, Acea entered into an agreement for the purchase of an equity holding of 100%, respectively, of the share capital of PF Power of Future S.r.l. (“PF Power of Future”) and IFV-ENERGYS S.r.l. (“IFV-ENERGYS”), companies that produce energy from photovoltaic plants. The acquisition compries 4 operational ground-mounted solar assets, with a total installed capacity of 3.6 MWp. PF Power of Future S.r.l owns an operational ground-mounted solar asset, located in Aprilia (LT), with an installed capacity of 2.18 MWp; whereas, IFV-ENERGY owns 3 operational ground-mounted solar assets (Viterbo B, Viterbo C and Viterbo D) with a total installed capacity of 1.43 MWp. Specifically, Viterbo B plant, located in Grotte di Castro (VT), has an installed capacity 0.30 MWp, Viterbo C and Viterbo D plants, both located in San Lorenzo Nuovo (VT), have an installed capacity, respectively, of 0.56 MWp and 0.57 MWp. The assets of PF Power of Future and IFV-ENERGY benefit from feed-in-tariff contracts with Gestore dei Servizi Energetici, which are remunerated, respectively, under the “Quarto” and “Terzo Conto Energia” incentive schemes, guaranteeing stable revenue streams. Based on 100% of the enterprise value of PF Power of Future and IFV-ENERGY, the transaction has an economic value of Euro 11.3 million.
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Reorganisation of the Group’s departments and segments In June 2020, the Group has made several changes to its structure in order to streamline and centralize the oversight of certain operations, including the introduction of a Chief Operating Officer. Pursuant to such reorganization, the Water, Environment and Engineering and Services segments and ARETI will report directly to the Chief Operating Officer; in addition, several companies included in the Energy Infrastructure segment have been reallocated to other segments.
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OVERVIEW OF FINANCIAL INFORMATION OF THE ISSUER
The following financial information is taken from the audited consolidated financial statements of ACEA as at and for the year ended 31 December 2019 and 31 December 2018. The audited consolidated financial statements of ACEA as at and for the years ended 31 December 2019 and 31 December 2018, which have been audited by PricewaterhouseCoopers S.p.A., as well as the accompanying notes, are incorporated by reference into this Base Prospectus. The financial information below should be read in conjunction with, and is qualified in its entirety by reference to, such financial statements, reports and the notes thereto. See also "Information incorporated by reference".
Certain figures included in the financial information set out in the tables below have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
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Consolidated Balance Sheet – Assets
As at 31.12.2019 As at 31.12.2018 (audited) (millions of euro) Property, plant and equipment ...... 2,609 2,365 Investment property ...... 2 2 Goodwill ...... 183 150 Concessions ...... 2,484 2.126 Other intangible assets ...... 222 147 Right of use ...... 63 n.a. Investments in: subsidiaries and associates ...... 268 279 Other investments ...... 3 3 Deferred tax assets ...... 238 227 Financial assets ...... 47 56 Other assets ...... 381 380 NON CURRENT ASSETS ...... 6,501 5,736 Inventories ...... 57 49 Trade receivables ...... 1,035 928 Other current assets ...... 213 253 Cash and cash equivalents ...... 836 1.068 Current financial assets ...... 299 114 Current tax assets...... 12 10 CURRENT ASSETS ...... 2,453 2,421 Non current assets available for sale ...... 0 0 TOTAL ASSETS ...... 8,954 8,157
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Consolidated Balance Sheet – Liabilities and Shareholders’ Equity
As at 31.12.2019 As at 31.12.2018 (audited) (millions of euro) Shareholders’ Equity: Share capital ...... 1,099 1,099 Legal reserve ...... 119 112 Other reserves ...... (210) (286) Retained earnings / (accumulated losses) ...... 562 534 Net profit / (loss) for the year ...... 284 271 Total shareholders’ equity attributable to the Group ...... 1,855 1,730 Minority interests ...... 252 174 Total shareholders’ equity ...... 2,107 1,903 Staff termination benefits and other defined benefit obligations ...... 105 104 Provisions for liabilities and charges ...... 151 137 Borrowings and financial liabilities ...... 3,552 3,374 Other liabilities ...... 391 34 NON-CURRENT LIABILITIES ...... 4,199 3,963 Trade payables ...... 1,600 1,525 Other current liabilities ...... 362 329 Borrowings ...... 674 409 Taxes liabilities ...... 12 28 CURRENT LIABILITIES ...... 2,649 2,291 Liabilities directly associated with assets held for sale ...... 0 37 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ...... 8,954 8,157
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Consolidated Statement of Cash Flows
As at 31.12.2019 As at 31.12.2018
(audited)
(millions of euro)
Cash flow from operating activities Profit before tax from continuing operations…………………….. 430 409 Profit before tax from discontinued operations………………….. 0 0 Depreciation/amortisation……………………………………….. 410 367 Revaluations/impairment charges……………………………….. 23 18 Increase/(decrease) in provisions for liabilities………………….. 5 (52) Net increase/(decrease) in staff termination benefits……………. (11) (7) Gains on disposals………………………………………………. 0 0 Net financial interest expense…………………………………… 90 83 Income taxes paid……………………………………………….. (133) (79) Cash flow generated by operating activities before changes in 815 739 working capital………………………………………………… Increase in current receivables…………………………………. (119) 99 Increase/decrease in current payables…………………………… 42 (16) Increase/(decrease) in inventories……………………………….. (7) (8) Change in working capital…………………………………….. (85) 76 Change in other assets/liabilities during the period 39 (90)
TOTAL CASH FLOW FROM OPERATING ACTIVITIES 770 725 Cash flow from investment activities Purchase/sale of property, plant and equipment…………………. (431) (242) Purchase/sale of intangible fixed assets………………………….. (362) (375) Equity investments……………………………………………….. 0 0 Purchase/sale of investments in subsidiaries…………………….. (44) (6) Proceeds/payments deriving from other financial investments….. (178) 116 Dividends received……………………………………………….. 17 9 Interest income received………………………………………….. 21 21 TOTAL…………………………………………………………… (977) (477) Cash flow from financing activities Non-controlling interests in subsidiaries’ capital increase……….. 0 0 Repayment of borrowings and long-term loans………………….. (314) (381) Disbursement of borrowings/other medium/long-term loans……. 500 1,000 Decrease/increase in other short-term borrowings……………….. (89) (233) Interest expense paid……………………………………………… (109) (108) Dividends paid……………………………………………………. (74) (137) TOTAL CASH FLOW………………………………………….. (86) 140 Changes in shareholders’ equity after net profit…………………. 0 0 Cash flows for the period……………………………………….. (293) 387 Net opening balance of cash and cash equivalents……………. 1,068 681 Net closing balance of cash and cash equivalents…………… 836 1,068
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Consolidated Income Statement
Year ended 31 December 2019 2018 (audited) (millions of euro) Sales and service revenues ...... 3,022 2,837 Other operating income ...... 164 192 Consolidated Net Revenues ...... 3,186 3,028 Staff costs ...... 249 220 Cost of materials and overheads ...... 1,936 1,919 Total Operating Costs ...... 2,185 2,139 Net profit / (loss) from commodity risk management ...... 99 0 Income / (charges) from equity investments of a non financial 41 43 nature ...... Gross Operating Profit...... 1,042 933 Amortisation, depreciation, provisions and impairment charges .... 524 455 Operating Profit / (loss) ...... 518 479 Finance (costs) / income ...... (90) (83) Profit / (loss) on investments ...... 2 13 Profit / (loss) before tax ...... 430 409 Taxation ...... 123 124 Net Profit / (loss) from continuing operations ...... 307 285 Net Profit / (loss) from discontinued operations ...... 0 0 Net Profit / (loss) for the year ...... 307 285 Net Profit / (loss) attributable to minority interests ...... 23 14 Net Profit / (loss) attributable to the Group ...... 284 271
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REGULATORY
EU and Italian laws significantly regulate ACEA’s core energy, water, networks and waste management businesses and these regulations may affect ACEA’s operating profit or the way it conducts business. The principal regulations applicable to ACEA are summarised below. Although this summary contains all the information that ACEA’s management considers material in the context of the issue of the Notes, it is not complete. Investors should read this summary together with the legislation applicable to ACEA, and not rely on this summary only.
Water business
The Galli Law and Environmental Code
The first comprehensive set of legal provisions enacted to regulate the sector of water services was contained in Law No. 36 of 5 January 1994 (the "Galli Law") aimed at revising the existing scheme of regulation applicable to the management of water resources, the supply of drinking water and waste water treatment.
The Galli Law supported a transition towards integrated management of all water resources, including both drinking water services and waste water services and delegates the authority for the integrated water services to local authorities.
The Galli Law is no longer directly applicable since it has been repealed by Legislative Decree No. 152 of 3 April 2006 (the "Environmental Code"). Through the Environmental Code, the Galli Law was reviewed but substantively maintained.
The Environmental Code which contains integrated provisions for all environmental businesses and, in principle, the regulation of the management of the integrated water service system in Italy, is based on the following principles:
• establishing a sole integrated system for the management of the entire cycle of the water resources (integrated water services or "servizio idrico integrato"), including the abstraction, transportation and distribution of water for non-industrial purposes, water drainage and purification of waste water;
• identification, by the Italian Regions and within each of them, of "Optimal Territorial Districts" ("Ambiti Territoriali Ottimali" or "ATOs"), within which the integrated water services are to be managed. The boundaries of ATOs were defined on the basis of: (i) consistency with hydrological conditions and logistical considerations; (ii) the goal of achieving industry consolidation; (iii) the potential for economics of scale and operational efficiencies; and
• institution of a Water District Authority for each ATO ("Autorità di Ambito Territoriale Ottimale" or "AATOs"), responsible for: (i) organising integrated water services, by means of an integrated water district plan which, inter alia, sets out an investments policy and management plan relating to the relevant district (Piano d’Ambito); (ii) identifying and overseeing an operator of integrated water services; (iii) determining the tariffs applicable to users; (iv) monitoring and supervising the service and the activities carried out by the selected operator, in order to ensure the correct application of the tariffs and the achievement of the objectives and quality levels set out in the district plan.
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The organisation of integrated water services relies on a clear distinction in the division of tasks among the various governing bodies. The State and regional authorities carry out general planning activities. Local authorities (water district authorities) supervise, organise and control the integrated water services but these activities are managed and operated on a day-to-day basis by (public or private) service operators.
Law No. 42 of 26 March 2010 provided for the abolition of the AATO’s starting from 27 March 2011, which deadline has subsequently been extended to 31 March 2011, 31 December 2011 and again to 31 December 2012. By this deadline, regional governments were required to re- assign, by means of specific laws, the roles previously performed by the AATOs, in accordance with the principles of subsidiarity, differentiation and adequacy.
The Environmental Code provides for civil, penal and administrative sanctions in case of violations of its provisions.
It must also be noted that, from August 2011, according to the rules set forth by Legislative Decree No. 121 of 7 July 2011, some crimes concerning water discharge disposal have been introduced within Legislative Decree No. 231 of 8 June 2001 ("Decree 231/2001") on entities administrative responsibility which provides that a company is responsible for certain offences (not only crimes) committed by its executives, directors, agents and/or employees in the interest or to the benefit of that company.
Law No. 68 of 22 May 2015 (published in Official Journal 28 No. 122 on May 2015) approved new regulations on environmental crimes. In particular, Law 68/2015 introduces the new Title VI-bis - "Crimes against the environment" into the Italian Criminal Code amending art. 257 and 260 of Legislative Decree No. 152/2006. These new crimes add to the list of unlawful acts for which Authorities can be held responsible in accordance with Legislative Decree No. 231/2001, requiring an update of organisational models.
The Italian Regulatory Authority for Energy, Networks and Environment ("ARERA")
Article 21, paragraphs 13 and 19 of Decree Law 201/11 has transferred to the ARERA (formerly, AEEGSI) "the functions of regulation and control of water services" and at the same time abolishing the National Agency for the regulation and supervision of water sector.
The Decree of the President of the Council of Ministers dated 20 July 2012, implementing art. 21, paragraph 19 of Decree-Law 201/11, specifies, in Article 2, paragraph 1, that the functions of regulation and control of water services transferred to the ARERA also pursue the following objectives:
• guaranteeing the equal dissemination, accessibility and quality of services to users throughout the country;
• establishment of a tariff system that is fair, reliable, transparent and non-discriminatory;
• protection of the rights and interests of users;
• management of water services in terms of efficiency, economic balance and financial performance; and
• implementation of EU principles of "full cost recovery".
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Article 1, paragraph 1, of Law No. 481/95 provides that the ARERA should pursue, in the performance of their duties, "the purpose of ensure the promotion of competition and efficiency in the service sector utilities, (...) as well as adequate levels of quality in these services in terms of cost and profitability, ensuring usability and spread evenly throughout the country, defining a reliable tariff system transparent and based on predefined criteria, promoting protect the interests of users and consumers, taking into account the legislation Community and general policy guidelines formulated by the Government. The tariff system also harmonize the objectives economic and financial of the parties operating the service with the general objectives of character social, environmental protection and efficient use of resources".
The tariff method from 2016 to 2019: Resolution-No. 664/2015/R/IDR
On 28 December 2015, with Resolution No. 664/2015/R/IDR, the ARERA approved the new tariff method (MTI-2) for the period from 2016 to 2019. The new tariff method identifies the methodology to be used at the national level to determine tariffs for the years 2016 and 2017 and with some update for the 2018 and 2019. The new methodology represents the reference method to be used in the next few years.
The MTI-2 tariff recognises the large part of previous components, introducing some new condition:
(a) Main directives from the determination to be highlighted:
• every specific attribute for each Operator is chosen and referred to a matrix of 6 different patterns (in the previous method they will be just 4) related to some specific indicator and ratios: i.e. potential changes in the objectives or activities of the Operator (aggregation, significant improvements in quality of service); ratio between investment planned for the following years and the value of existing infrastructure; gap between Water Sector Asset Manager operating cost per inhabitant served and the average operating cost per inhabitant served estimated for the entire industry in 2014 equal to 109Euro/inhabitant;
• there is also a virtual regulatory scheme for financial years in the aggregation phase for which the Regulatory Agency does not have enough suitable information and specific regulation conditions apply (with limited and predefined duration) if equalisation measures are approved;
• it is sponsored the consolidation process enabling a unique tariff proposal in the case of aggregation of Operators between different ATOs;
• it is confirmed the presence of a tariff multiplier with an annual growth ceiling that also considers a certain sharing between the operator and the consumer to be applied on the basis of the cross-compliance of operating cost components;
• it has been introduced a premium/penalties adjustment related to service quality. The premium component is excluded from the threshold of the tariff increase;
• it has been set out criteria to recognize a portion of the costs of non-payment (80 per cent. of the charge actually sustained by Operator), considering the phenomenon’s different impact on the national territory (respectively on the
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sales North: 2.1 per cent.; Center: 3.8 per cent.; South: 7.1 per cent.) and encouraging the adoption of mechanisms for efficient credit management;
• the "ψ" parameter, utilized for the determination of the pre-funding component for new investment (FNI), might be selected in the range 0,4-0,8 (despite the previous range between 0,4-0,6);
• concerning the revision of values, the following is expected: on the contrary to what was specified in the water tariff method, the 2-year update of the RAB value, operating cost components that can be revised to cover adjustments, adjustments related to volumes and any changes concerning the valorisation of finance and tax cost components (the calculation of which has partially changed as below detailed).
(b) Net Capital Employed:
• inflation rate is determined as indicated in the resolution for the 2016-2017 but starting from the 2018, as first indication in the determination, the inflation is equal to 1;
• terminal value in case of takeover: starting from a minimal value (equal to the terminal value for the own assets realized from the Operator) to a maximum one (in which are included also other components not specifically referred to the Operator activities).
(c) Operating Costs:
• it is maintained the distinction between endogenous operating costs and upgradeable operating costs. It will be recognized also costs related to eventual operating integrations and/or significant improvements in quality service.
(d) Financial expenses:
• regarding financial and fiscal tariff components, ARERA has revised the individual components for the calculation, borrowing some elements from the new approach established by ARERA for the electricity tariffs. In particular, for the determination of the risk-free rate of return (risk-free rate, RF), it has been replaced the previous references to the Italian market (BPT to 10 years) with references chosen among the European countries with high ratings (government bonds to 10 years - Germany, Belgium, the Netherlands and France) considered at "zero risk" level compared with Italy. The risk-free rate, as defined above, is adjusted by introducing a new component called "Water Utility Risk Premium" (WRP) that represents an additional rate to cover both the risk factors of the Italian market and the average size of the operators of the sector, generally smaller, as well as the public and the local shareholders of the SII Operator. The cost of debt is revised downward in consideration of changes in its individual components; also in this case is considered an extra premium, in comparison with the same component in electric tariff, for the specific conditions of the sector. With regard to the rate of return on equity, however, the choice of the regulator is to leave this indicator unchanged among the previous period and reduced in comparison with the same parameter as established in the electricity
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sector: this different approach, between two sector subject to the same Regulatory Authorities, cause a severe distortion among the complex rules established in the entire regulation and compared with other sectors. In this sense, the company has appealed to protect itself and its stakeholders;
• recognition of a financial cost (time lag) equal to 1 per cent. due to the time lag between the year of investment completion and the year of recognition in tariff, as per previous method.
• With reference to the process of approval, by 30 April 2016 the Regulatory Agency:
a) defines the goals and, acquires the operator’s proposal concerning the necessary action to take to reach said goals, updating the Plan of Action ("PdI");
b) prepares the tariff for the second regulatory period 2016-2019;
c) draws up the Economic-Financial Plan ("PEF");
d) sends the above document to the ARERA.
Within 90 days, the ARERA, without prejudice to the need to request further clarification, approves the tariff proposals. The mechanism introduced by ARERA Resolution No. 643/2013/R/IDR was confirmed also for the second regulatory period. This makes it possible to avoid any inertia of local subjects in tariff proposals.
Under the MTI-2 method, tariffs for the year N are determined on the basis of the financial statements for the year N-2 (although some expected updates were introduced before the start of second half-period 2018-2019 with the resolution 918/2017/R/IDR). Therefore, tariffs for 2018 will be determined on the basis of 2016 financial statement (MTI), to be updated considering 2016 financial statements (2016 financial statement was ready in time for the implementation of the new tariff determination MTI-2 and then for the calculation of the 2018 tariffs) and the change introduced by the 918/2017. The process to review the entire tariffs is as usual under ATO control and approval, before becoming the new approved tariffs by Authority.
The new tariff method from 2020 to 2023: Resolution-No. 580/2019/R/idr
On 30 December 2019, with Resolution No. 580/2019/R/IDR, the ARERA approved the new tariff method (“MTI-3” or “Water Tariff Method”) for the period from 2020 to 2023. The new regulatory framework sets national standards (thus overcoming the water service local standards), makes operating costs more efficient, promotes environmental sustainability, also through the Plan for Strategic Works, and provides for incentives for installing metering devices, with the aim of raising citizens’ awareness of their own consuming habits. These are the main principles underlying the new Water Tariff Method, which also fully places the sector within the circular economy, rewarding energy efficiency and providing for incentives to save and reuse water. The MTI-3 applies to all water service operators in Italy (whether they are listed companies or operators working on behalf of local municipalities).
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With respect to the previous MTI-2, the new method essentially confirmed the configuration, general mechanism and methods for approving tariffs for the four-year period 2020-2023, notwithstanding the introduction of several significant changes.
First, the operator’s positioning criterion in the matrix of regulatory schemes changed, no longer depending on the interaction between average operating cost and the ratio of investment needs to RAB, but on the operator’s Guaranteed Revenue Constraint (GRC) and investment needs to RAB. The new rule involves a reduction in the maximum annual tariff increase in all the schemes of the matrix with variations from a minimum of 5.2% (scheme 1) to a maximum of 8.5% (scheme VI), while in the four-year period 2016-2019 the range of variation was from 6% to 9%.
The four-year duration of the regulatory period has been confirmed, with an update being provided every two years, as well as the possibility for an anticipated review, if so requested by the EGA, certifying the extraordinary nature of events that may affect the economic- financial balance of management activities. More inspection tools and control phases will ensure that potential tariff increases will only be possible following actual investments or certified operational improvements. In fact, a ceiling for tariffs increase has been confirmed, which, for the first time, is differentiated not only with regard to operating costs, but also on the basis of total costs per inhabitant served.
Another important element is represented by the introduction of an operating cost efficiency mechanism through the use of an econometric model for estimating the total cost boundary, determined according to the output level and the prices of inputs. The mechanism rewards those operators that achieve lower operating costs per capita than those estimated by the model, while in the opposite case the margin between recognised endogenous operating costs and efficient operating cost will feed into an allocative tool additional to the UI2 equalisation tariff component, for sustaining the bonus for technical and commercial quality.
Incentives have also been provided for measuring water consumption – installing water meters also for single apartments in condominiums - and for additional support to vulnerable users, decided at local level, to be added to the national Water Bonus introduced in 2018. The introduced Plan for Strategic Works is a tool for EGA aimed to focus the planned infrastructures dedicated to complex works with a useful life of over 20 years, which are considered a priority to ensure acceptable levels of service quality for end users and for the environmental protection. The Plan for Strategic Works includes works planned between 2020 and 2027 and indicates the time schedule of the various activities and any public funding that may be available.
The deadline for the submission of the tariff application was originally scheduled for 30 April 2020. However, in compliance with the deferred term, due to COVID-19 emergency, approved with resolution 59/2020 / R / idr, it has been postponed to 30 June 2020.
Quality Regulation: Resolution No. 655/2015/R/IDR
On 28 December 2015, with Resolution No. 655/2015/R/IDR, the ARERA approved the Integrated Text for the regulation of the contractual quality of the SII, in other words each of the single services comprised therein (RQSII). The minimum levels and objectives of the contractual quality of the SII were defined, by identifying indicators consisting of maximum time thresholds and minimum quality standards for the services to be provided to users, the same nationwide, also determining the methods for recording, communicating and checking
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the data from the services supplied by the service managers. In the event of failure to respect the specific quality standards for the individual services supplied to users, the Authority has introduced automatic indemnities to be paid to users in well-defined times and methods, while for the general quality standards, referring to the overall services, a mechanism of fines has been put in place. Sanctions are also provided for the failure to respect the standards in the event of repeated breaches of the standards and in the event of breaches being ascertained during checks by the Authority. The Integrated Text (RQSII) included 44 standards (30 specific and 14 general) concerning services involved in the start-up, management and termination of contractual relations, charging, billing, payment and division into instalments, complaints, written requests for information and billing rectification, the management of outlets, the quality of telephone services and obligations in the event of the application of art. 156 of Legislative Decree 152/2006. The new quality regulations, introduced at the end of 2015 resolution, came into force on 1 July 2016, except for certain aspects concerning automatic indemnities (especially the mechanism for increasing the indemnity for failure to respect minimum standards over time), the obligations to notify the Authority and framework government authorities (EGA) and the quality obligations for telephone services, which are applicable from 1 January 2017. The Resolution also provides for the possibility that the framework government authorities, also following a proposal by the service manager, make specific claims requesting the application of higher standards than those in the RQSII, also stating the date of their entry into force.
The Italian Law no. 205/2017 introduced certain measures to strengthen (i) the protection for the end users, in cases where invoiced amounts for consumption were dated back more than two years, and (ii) disclosure obligations placed on water service operators. Then ARERA, with resolution 571/2018/R/IDR, launched a monitoring activity aimed at verifying the correct implementation of the contractual quality regulation and updating its current regulations. In October 2019, with DCO 422/2019/R/IDR ARERA started a consultation on such subject, aimed at illustrating the main lines of action set out.
The final measure, Resolution 547/2019/R/IDR, included the regulation of the contractual quality of the integrated water service, as defined by Resolution no. 655/2015/R/IDR, in order to strengthen the protection of users’ interests and guarantee adequate levels of performance by operators.
With the new provisions relating to contractual quality, an incentive mechanism was introduced similar to the one envisaged for the regulation of technical quality, based on the construction of 2 macro-indicators obtained from the 42 simple indicators already envisaged by Resolution 655/2015/R/IDR: (i) MC1 “Initiation and termination of the contractual relationship” composed of simple indicators relating to estimates, the execution of connections and works and the activation and deactivation of services; (ii) MC2 “Management of the contractual relationship and accessibility to the service” composed of simple indicators relating to appointments, invoicing, meter and pressure level checks, responses to written requests and the management of contact points with users. The macro-indicators are calculated as the average of the relevant simple indicators, weighted according to the number of services provided. Based on the initial performance levels related to each macro-indicator, three classes of annual targets are identified: Class A (maintaining the starting level), Class B (with improvement of 1%), Class C (with improvement of 3%). Rewards and penalties with respect to the objective set based on the starting level are determined through a multi-stage assessment broken down into base level and level of excellence. Prizes and penalties will be quantified from 2022 onwards based on performance in each of the two previous years (just for the first year of the
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performance evaluation, 2020, the starting level is defined on the basis of the simple indicators recorded in 2018). This represents a further important innovation to the previous regulatory framework.
In terms of contractual quality, the provision foreseen to extend the protections also to non- contractual entities that require the performance of services preparatory to the conclusion of the supply contract. If a contractual relationship is established for the supply of the water service, the operator is required to provide automatic compensation under Title X of the RQSII in the first subsequent invoice. A minimum billing frequency of not less than one month is then introduced, and details are provided on the standards for services whose execution time depends on the work of third parties (reading meters in joint consultation with chambers of commerce, in accordance with Italian Ministerial Decree 93/2017, and complex works for which works to be carried out by the user are necessary or which deeds like concessions, authorisations or easements must be requested for). Attachment B of Resolution no. 547/2019 contains provisions on the subject of disclosure obligations in the event of a two-year limitation period as per the amendments introduced by the Italian 2018 Budget Law no. 205/2017.
Deposit of users: resolutions 02/28/2013 - 86/2013/R/IDR and 27/12/2013 - 643/2013/R/IDR
On 28 February 2013, the ARERA approved a resolution that regulates the deposits of users. The ARERA provided that:
• the operator may require the end user at the time of conclusion of the supply contract, the payment of a security deposit;
• the security deposit charged by the operator in accordance with Article 3, paragraph 3.1, is determined by the value of the consideration payable for a maximum of three months’ historic consumption;
• for end users with supply contracts in place at the time of entry into force of this provision: the operator may retain a security deposit, executing the related adjustments, the amounts paid by end users before the entry into force of this measure as an advance on consumption or guarantee executing the related adjustments.
Quality of Water Fit for Human Consumption
Legislative Decree No. 31 of 2 February 2001 ("Decree No. 31/2001") redefined the quality requirements for fresh water and introduced measures to guarantee the protection of fresh water sources. The law was introduced to safeguard human health from water contamination by ensuring that all water is healthy and clean.
"Water for human consumption" includes all water of any origin, prior to or following treatment, which is provided for consumption or utilised by food industries. Mineral and thermal waters are excluded from this category.
Decree No. 31/2001 established the quality requirements for fresh water on the basis of parameters and values defined in Annex I of such legislative decree. To ensure compliance with those parameters, Decree No. 31/2001 also provided for periodical water quality checks. These checks may be carried out by the operator of the integrated water services (internal monitoring) or by a local health unit (external monitoring). Water provided for human
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consumption had to comply with the parameters set out in Annex 1 to Decree No. 31/2001 by 25th December 2003.
Constitutional Court judgment 335/2008
Constitutional Court judgment 335 of 10 October 2008 ("Decision 335/2008") declared both Article 14, paragraph 1 of the Galli Law and the corresponding Article 155, paragraph 1 of the Environmental Code to be partially unconstitutional. These provisions established that the tariff component covering waste water treatment is payable by end users "even if there are no treatment plants or such plants are temporarily inactive".
The judgment is based on the opinion that the integrated water services tariff represents payment for services provided under contract and not a form of taxation.
Following Decision 335/2008, the Italian Parliament approved Law No. 13 of 27 February 2009, which under Article 8-sexies introduced a new binding component to the tariff, remunerating the costs incurred in carrying out the overall activities involved in water treatment, including the design, construction and completion of plants and the related investments, as expressly identified and programmed in the area plans.
Under the new legislation, this new component "must be paid" to the operator by end users, in cases where there are no treatment plants or such plants are temporarily inactive, from the start- up of the tender procedures for the design or completion of the infrastructure necessary in order to provide the treatment service, provided that such procedures are implemented in accordance with the established schedule. The second paragraph of Article 8-sexies referred to above, also governs the method of reimbursing the sums received from end users, in accordance with the Constitutional Court ruling, establishing that the design, construction and completion costs incurred are to be deducted from the rebate.
The Ministry of the Environment issued a decree on 30 September 2009, published on 8 February 2010 (the "Ministerial Decree"), setting out the rules concerning the reimbursement of the disallowed tariff component covering waste water treatment.
In particular, the Ministerial Decree establishes that:
• the operator must provide the Water District Authority with all the relevant information necessary to permit the ARERA to calculate the amount of the rebates. In particular:
(a) the customers’ list containing all the information about whose customers are connected to the sewage network;
(b) amounts paid by the single customer with reference to the tariff component covering waste water treatment;
(c) all the information related to costs incurred in design, construction and completion of the treatment plants; and
(d) the calculation of sums paid by end users in connection with waste water management;
• the rebate must be calculated by the Water District Authority, on the basis of the information provided by the operator;
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• the operator must reimburse the disallowed tariff component, either in a lump sum or in instalments, within five years from 1 October 2009; and
• the Water District Authorities are authorised to take all measures necessary to ensure that the operator maintains its financial stability, possibly through an extraordinary revision of tariffs.
In any case, following the approval of the Ministerial Decree, the MTT, the MTI and now confirmed by MTI-2, confirmed by MTI-3, have substantially provided for the balancing of the reimbursement to end users, thus guaranteeing the revenues of the relevant operators.
Regulation First Year: 2016 – ARERA Water Services Activities
(a) Resolution 137/2016/R/COM: "integration of the accounts unbundling integrated text (TIUC) with the provisions concerning the accounts separation (unbundling) obligations for the water sector":
• With this Resolution, the ARERA has integrated the current unbundling of accounts provided in the TIUC (Accounts unbundling integrated text) for the electricity and gas sectors with the introduction of accounts unbundling obligations for the managers of the SII and relevant communication obligations. The measure, which follows a detailed consultation process (82/2013/R/com, 379/2015/R/IDR and 515/2015/R/IDR) and focus group with those involved, thus completes the regulatory framework for accounts unbundling, adopting a new version of the TIUC, which contains the provisions previously in force for energy services and the new provisions for the water sector. The resolution provides that the accounts unbundling system for the water sector is applicable to all the managers of the SII managing the service on the basis of an awarding procedure in compliance with the laws in force. In particular, with regards to the water service, an ordinary regime is provided that is applicable to the managers of the SII serving more than 50,000 inhabitants and for multi-ATO managers and larger entities (as identified by the Framework Authorities) which, although not providing the service to end users directly, manage the resources, treatment and/or waste treatment. The resolution confirms the introduction of the geographical-territorial size as the basis for the accounts unbundling of the SII at the ATO level in order to enable the recording of all the economic and equity data for each SII service, which are required to guarantee its application. The new provisions concerning the accounts unbundling of the SII will be applicable as of the 2016 financial year, this financial year being considered as experimental for the water sector. Therefore, the data recorded during the initial collection of unbundling data is not expected to be used for the approval of the 2018 tariffs. The managers of the SII may prepare the annual accounts for the 2016 and 2017 financial years separated according to the simplified regime of accounts unbundling, except for the multi-ATO managers and the managers that are required to prepare the annual accounts separated according to the ordinary regime for the electricity and gas sector. On 2 May 2016, the ARERA published on its company website the schemes of the unbundled annual accounts (CAS) for the first financial year starting after 31 December 2015 (2016 financial year) for activities in the water sector.
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(b) Resolution 218/2016/R/IDR: "Provisions for supplying the measurement service of the integrated water service at a national level":
• This measure introduces an initial set of provisions concerning the utility measurement, deferring to subsequent measures the regulations of the industrial utilities authorised to discharge in public drainage systems, the matter of water balance and the definition of the performance levels of the measurement service. The new provisions in the integrated text for the regulation of the measurement service in the framework of the integrated water service at a national level (TIMSII), annexed to the resolution, concern, in particular:
• the responsibility for the measurement service, assigned to the managers of SII which manage aqueduct activities nationwide and will then also invoice the drainage and waste treatment payments for the same levels of consumption;
• the obligations for the installation, maintenance and checking of the utility meters (including meeting the criteria for conducting the meter reading activities in accordance with applicable law);
• the obligations for collecting utility measurements (introduction of a minimum number of annual attempts to read meters, differentiated on the basis of the consumer category, minimal time lags between attempts and repeating the attempt to read meters in the event of utilities with inaccessible or partially accessible meters);
• the obligation to make available to end users at least three methods of self-meter reading (SMS message, telephone call and web chat) active at all times 365 days a year;
• the method of calculating the mean annual consumption to be used in order to determine the minimum number of annual meter reading attempts and the method for estimating and reconstructing data;
• the obligations for filing and making available to those involved the measurement data and the obligations of recording and notifying the Authority.
The resolution also includes an integration to the communication obligation to bill users as of 1 January 2017, establishing that the bill must contain the minimum number of meter reading attempts annually in addition to the average annual consumption of the user as defined in the TIMSII. The timeframe for the application of the new Measurement provisions is the same as that in resolution 655/2015 (contractual quality), in other words 1 July 2016, it being understood that some provisions will come into force subsequently, such as those concerning the general criteria for recording consumption levels and the availability of web-chat mode (from 1 January 2017) and electronic meter reading (from 1 July 2017). However, there is a possibility that the framework government authority may submit reasoned requests for derogation to the Authority for a maximum of twelve months should the service managers prove that they are unable to fulfil the provisions of the measure. The ARERA accepted the claims submitted by ACEA ATO 2 and ACEA ATO 5 for the
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derogation of the obligation to open a provincial branch in resolutions 324 and 374.
Regulation second Year: 2017 – ARERA Water Services Activities
a) Resolution 665/2017/R/IDR "Approval of the integrated text on water fees (TICSI) laying down the criteria for the tariff structure applied to users"
The measure, adopted after a structured consultation process, defines the principles and guidelines for reorganizing the fees in the interests of streamlining the types (and sub- types) of use – whether domestic or non-domestic – as well as of the homogenization of the tariff structures currently in force. In particular, for the domestic type it foresees a simplification and containment of the sub-types (domestic resident, apartment building use, non-resident domestic use and any two further sub-types of uses). For domestic resident uses, the tariff structure provides for each aqueduct, sewerage and purification service, a variable amount proportional to consumption and – limited to the aqueduct service – modulated by bands (preferential, basic and from one to three excess bands) and a fixed amount, not correlated to consumption. For the variable aqueduct amount, the application of a minimum preferential consumption band is envisaged (determined with reference to the minimum vital quantity set by the DPCM of 13 October 2016 at 50 litres/inhabitant/day) and configured based on a per capita criterion. The variable amount of the aqueduct service, moreover, is defined according to the actual number of components, if this information is already available to the EGA; otherwise according to a standard per capita criterion (domestic resident user type equal to 3 components), until the completion of the information set necessary, to be implemented by 2021 at the latest. For non-domestic uses, there is the obligation (from 2018) of equating the types of non- domestic use to the six envisaged by the authorities (industrial use; artisan and commercial use; agricultural and livestock farming use; public use that cannot be cut off; public use that can be cut off; other uses). For this type the overcoming of the minimum committed and a binomial tariff structure (fixed rate and variable rate) is also envisaged. As regards the tariff rates application for the year 2018, the Authority establishes that the operator, at least in the last billing cycle of 2018, must issue bills based on the new approved tariff structure.
For the collection and purification tariff of industrial wastewater, the application of a trinomial structure based on a fixed amount is envisaged (entirely attributed to the sewerage service), "capacity" amount (entirely attributed to sewerage) and variable amount (proportional to volumes discharged and quality of wastewater) and compliance with the expected constraint on revenues (maximum flexibility of +10%) and the condition of sustainability per individual industrial user (increase in expenditure no higher than 10%).
The new rules for reorganizing the final user rates, including the application of the trinomial structure of the tariff for the collection and purification of industrial waste, apply as of 1 January 2018, postponing until 2020 (in coordination with the unbundling rules) the application of a uniform criteria for allocating the cost of treatment between industrial and domestic users, and however, imposing starting from 1 January 2022, the mandatory application of the per capita criterion based on the actual size of the components for the variable amount of the aqueduct service for domestic resident users.
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b) Resolutions 917/2017/R/IDR – Adjustment of the technical quality of the Integrated Water Service or of each of the individual services that it comprises (RQTI)
With this measure, the Authority has defined the rules on the technical quality of the SII with an approach that takes into account the specific conditions of the various contexts in order to identify the correct and effective stimuli to promote benefits for users of various services. The new model, defined as a result of and in continuity with the extensive consultation carried out (DCO 562/2017/R/IDR and DCO 748/2017/R/IDR) is based on a system of indicators comprising:
• prerequisites: that represent the conditions required for admission to the incentive mechanism associated with the general standards; • specific standards: that identify the performance parameters to be ensured in the services provided to the individual user and failure to comply with them leads to the automatic application of compensation; • general standards: divided into macro-indicators and simple indicators that describe the technical conditions for the provision of the service to which an incentive-based mechanism is associated.
Each macro-indicator is associated with a classification table which allows the relevant class to be identified and the consequent annual objectives that the operator is required to achieve, articulated into maintenance objectives of the highest class and the improvement objectives for the other classes with differentiated values based on the starting conditions encountered.
A system of incentives is applied, structured into awards and penalties to be allocated from the year 2020, according to the performance of operators recorded in each of the two previous years and with three assessment stages (basic, advanced and excellent). The allocation takes place in a symmetrical way for awards and penalties, in accordance with an approach that takes account of the initial situation and performance changes. For the advanced and excellent levels, a multiple criteria analysis is applied that uses the TOPSIS (Technique for Order Of Preference by Similarity to Ideal Solution) methodology.
The hedging of costs related to compliance with the specific standards and the achievement of the objectives set out in the Technical Quality takes place as determined by the tariff method (MTI-2), as supplemented by resolution 918/2017/R/IDR. In particular, expenditure for investment concerning measures adopted and included in the interventions programme (IP), is financed in the framework of updating the relevant economic-financial programme (EFP) or, in the case of the conditions are met, in application of the provisions laid down with regard to the extraordinary review. The government Entity in the field may, however, formulate a specific request to hedge any additional operating costs.
The resolution provides for the application of the system of indicators based on the Technical Quality –as well as the start of their monitoring – starting on 1 January 2018 (based on the value assumed by the macro-indicators in the year 2016, while from 1 January 2019 it will be based on the value in the previous year, where available), and from 1 January 2019 the application of the rules concerning the recording and archiving of data obligations provided by the same measure.
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The incentive-based mechanism (awards/penalty) is planned to enter into force for the sole macro-indicator M2 from 2020, without prejudice to the monitoring obligation.
The definition of the timescales and procedures for reporting the data monitored and the Technical Manual have been postponed until subsequent measures.
c) Budget Law 2018 (Law 205 of 27 December 2017)
As regards the Integrated Water Service, Law 205 of 27 December 2017 approved the so-called amendment on "maxibollette" (maximum bills), reducing the period of limitation of the right to remuneration water service supply contracts in relations between customers (domestic, professionals and micro-enterprises) and the seller to two years. These rules apply with reference to bills that fall due after 1 January 2020.
The ATO 2 new tariff approval: Resolution No. 674/2016/R/IDR
By resolution 674/2016/R/IDR, the ARERA approved the specific regulatory schemes, aimed at managing ACEA ATO 2 2016-2019 tariffs. In particular, the ARERA has accepted an instance, proposed by the Technical Secretary of the Ente d’Ambito, for the contractual quality awards recognition in relation to the improvement of the indicators defined by resolution 655/15 (except those relating to processes that are not in the operating organisation or with more stringent levels in service). 43 indicators out of 47 established by Resolution No. 655/2015 have been indicated as improving objects, with an estimated improvement average value of 46.5% in 2016 and 38.3% in subsequent years. Considering the award tariff impact, by reference to the 2016 performance, within the limits of the results and service quality improvement levels achieved, starting from the 2018 tariff the Conference of Mayors charged:
• Euro 19.6 million in respect of the 2018 fares (assuming that in 2016 the manager will be able to achieve at least the 65% of the maximum premium equal to almost Euro 30 million);
• Euro 40.2 million in respect of the 2019 and subsequent years fares (assuming that 100% of the maximum premium will be achieved after 2016).
ARERA welcomed the proposal, yet to be resolved upon, by the Conference of Mayors, relating to the use of the solidarity fund, available as at 31 December 2015 (Euro 13.2 million), to further reduce the balance already approved in the previous regulatory period (about Euro 39.8 million) with tariff consequences in 2016. The resources generated through the contribution collected in bills during the 2016 for solidarity purposes have been retained, while, from 2017 the item "solidarity contribution" will be repealed and the solidarity fund will receive the new investment fund (FNI) fixed amount, equal to 2 million/year, in line with the provisions of the MTI-2 and pending the introduction of the social tariff (introduced by DPCM October 13, 2016).
In 2018, for the purposes of recalculating tariffs as set forth under Resolution 918/2017/R/IDR of 27 December 2017, "Biennial update of the tariff arrangements of the integrated water service", ACEA ATO2 has been proceeding with the biennial update of the tariff arrangements of the integrated water service and the process is in a full implementation.
Other resolutions of 2017 in the water regulation
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a) Resolution 897/2017/R/IDR: "Approval of the integrated text of the application modalities of the social water bonus for the supply of water to economically disadvantaged domestic users":
With the TIBSI the AEEGSI establishes the social water bonus confirming most of the orientations expressed during the consultation process (DCO 470/2017 and 747/2017).
● Beneficiaries: users who are entitled to the electricity and / or gas bonuses due to economic hardship (domestic residents who belong to a family with an ISEE indicator not exceeding 8,107.50 euros or 20,000 euros with at least 4 dependent children);
• Supplementary bonus: the EGA can introduce or confirm a "local bonus". In this case, the EGA will remain free to recognize to the final user an additional amount of facilitation compared to that provided for by the sector regulation and / or to extend the ISEE threshold envisaged for admission to the bonus.
• Value: the "social bonus" is calculated on the basis of family size (per capita) by applying the preferential tariff to the minimum vital water quantity.
• Admission: the bonus request will be presented to the municipality of residence together with the bonus energy. The management of the applications will take place through the EMS computer system through which the municipality will carry out the checks for admission, while the manager will only have to check the contract.
• Disbursement: in the bill through the application of a compensatory tariff component for direct users determined with the pro quota day criterion (the integrative bonus can also be recognized as a one-off), through recognition of a one-time contribution for indirect users.
• Transparency: in the summary of the bill the amount of the social water bonus paid (and the amount of additional water bonus if present) paid must be indicated as a deduction of the fees for the variable portion of the water supply service.
• Social Bonus coverage: UI3 tariff component (0.5 cents / € m3) applied to all users of the SII other than those directed under conditions of economic and social hardship, as an increase to the amount of the aqueduct. The coverage of the bonus related to the bonus is made by means of an OPsocial cost component operating on a local basis to which the share of FoNI already allocated for tariff subsidies will be allocated.
• Bonus validity: twelve months, renewable.
In 2018, the procedures for applying the social water bonus have been defined (resolution n. 227/2018/R/IDR) for domestic users living in conditions of economic hardship. The provision, in particular, regulates the information flows, the exchange of data and the operating methods for the payment of the social water bonus as well as the information and communication obligations placed on the subjects involved in the mechanism to allow, starting from 1 July 2018, the granting of the concession to users who request it.
In 2019, in accordance with article 5, paragraph 7 of Italian Law Decree 4/2019 containing urgent provisions on universal basic income and pensions, ARERA supplemented/amended the regulations on bonuses for regulated services in compliance with the new regulatory framework.
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In particular, in the TIBSI the references to “Retail Card” and “ReI Card” were removed, while it was established that beneficiaries of universal basic income and pensions could apply for bonuses from 20 May 2019. As a result, conforming changes were made to the application/renewal forms (Determination 1/2019 – DACU). Moreover, following certain issues that emerged during the initial implementation phase, the detailed procedures for the validation of social water bonus requests and the procedures for the recognition of the one-off quota were further developed (Determination 4/2019 – DACU).
With Report 280/2019/I/COM, ARERA submitted to the Parliament and the Government some considerations regarding social bonuses for the supply of electricity, natural gas and water, proposing a procedure to guarantee their automatic use to all potential beneficiaries. In fact, the data showed that despite the efforts made to disseminate knowledge of these programmes, their use is not particularly widespread among those entitled to use them. ARERA also called for the extension of the social water bonus to the recipients of universal basic income and its reconfiguration, in order to include the expenses related to sewerage and purification services.
Finally, with Resolution 499/2019/R/COM and in accordance with the provisions issued by the decree of the Minister of Economic Development of 29 December 2016, ARERA update the value of the ISEE threshold for qualifying for social bonuses from € 8,107.50 to € 8,265. The update will be effective from 1 January 2020. Subsequent updates will take place every three years. ARERA estimates that with this adjustment the social water, electricity and gas bonus will be extended to 200,000 new families.
b) Resolution 900/2017/R/IDR: "Extension of the availment of Single Buyer S.p.A. to the water sector, implementing the resolution of the Authority 622/2017/E/IDR"
The measure complements the regulatory framework for the extension of the protection system expanding the AU’s recourse activities also to the water sector (with charges incurred by the "Account for the promotion of the quality of the aqueduct, sewerage and purification services" fed by the component UI2) and changing the name of the "Energy consumer help-desk" to the "Energy and Environment consumer help-desk" (Resolution 920/2017/R/IDR).
Regulation Year 2018 – ARERA Water Services Activities
Resolution 9/2018 - DACU Changes to the regulation of the operators - managers portal and to the user manual as per the resolution of 5 January 2017, 1/DCCA/2017
With Resolution 55/2018/E/IDR, ARERA defines the transitional regulations in force from 1 July 2018 until 30 June 2019 for the extension of the consumer protection system to the water sector and for the out-of-court settlement of disputes already active in the electricity and gas sectors. Approved after two consultations in the months of September and December 2017, the provision contains two attachments:
• Annex A "Transitory regulations concerning voluntary out-of-court settlement procedures for disputes between water users and operators";
• Annex B "Regulations concerning the activities carried out by the desk with reference to the processing of second-level complaints of water users".
With regard to the Transitional Regulation, we note:
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• Mediation Scope: from 1 July 2018, attempts to mediate disputes between users and their managers will be voluntary and possible - also through the ARERA Mediation Service - and for issues related to the aspects regulated by ARERA itself and for all other issues of interest to the user of the IWS, with the exclusion of those not falling within the scope of application of the Integrated Text of Mediation (TICO) and those relating to water quality;
• Duration of the transitional period: the transitional period, defined in the document itself as the "period from the activation for the water sector of the ARERA Mediation Service managed by the Single Buyer, as of 30 June 2019", will start on 1 July 2018 and will end on 30 June 2019. An assessment of the implementation status of the transitional provision is envisaged in order to evaluate further gradual mechanisms, after discussion with the stakeholders;
• Exemptions from the implementation of the regulation: if the manager proves that it cannot comply with the obligation to take part in the mediation procedure in the times provided, the EGA responsible, in agreement with the manager and the regionally registered local consumer associations, has the right to submit to ARERA a request for a justified exemption limited to this obligation and for a maximum period of one year, in any case with a deadline of 31 December 2019. The application is considered admissible if it is submitted by 30 September 2018 and if it is based on the existence of ongoing aggregation processes involving the manager submitting the application. ARERA will check the requests received and grant or deny the requested exemption.
With Resolution 56/2018 ARERA launched a fact-finding investigation concerning complaints and reports sent to ARERA by IWS users, Consumer Associations and local public bodies. The procedure, which was completed on 31 December 2018, concerns in particular the most recurrent critical issues communicated to ARERA regarding:
• interruptions to the supply of the service due to causes or methods that do not comply with current legislation and/or user contracts;
• delays in the execution of works/connections associated with transfer and/or take-over procedures;
• failure to comply with the frequency and transparency of billing;
• responses to complaints, notifications and requests for information from users (missed responses, inaccurate/generic responses also sent using standard forms, inadequate assistance from call centre operators).
Lastly, again with regard to consumer protection, we point out DCO 199/2018/R/com "Guidelines for sectoral efficiency and harmonisation of the regulation regarding out-of-court dispute resolution procedures between customers or end users and operators or managers in the sectors regulated by the authority for energy networks and the environment (TICO)" with which ARERA expresses its orientation on the topic (by offering 14 different ideas) and represents some clarifications that apply to the regulation. The effectiveness of the interventions subject to consultation will start from 1 January 2019, with the exception of the provisions for the water sector which are proposed to be effective from 1 July 2018 (coinciding with the entry into force of the transitional period pursuant to Resolution 55/18). Despite the
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several changes introduced by the consultation document, no new deliberation is still followed yet.
Regulation Year 2019 – ARERA Water Services Activities
Resolution 242/2019/A “ARERA 2019-2021 strategic framework” The measure adopted by the Authority’s Strategic Framework for the three-year period 2019- 2021 takes into account the results of the consultation, including the information that emerged from the hearings of 8-9 May 2019. The document’s inspiring principles include a more central role for the consumer, the use of innovation in technology and processes, a particular attention to uniform development in the different areas of the country, to which principles of asymmetric regulation will be applied in order to make the level of public services more uniform. With specific reference to the integrated water service, the main changes in the Strategic Objectives (SOs) are the following: • SO 2 (“Consumer Awareness and Transparency for a better evaluation of the service”): periodic publication of performance indicators for each operator with the aim of monitoring and improving the available information and users’ willingness to pay, also with benefits in terms of reduction of payment arrears; • SO 4 (“Supporting innovation through experimentation and research”): extension to the IWS of the objective of developing innovative projects to strengthen metering and assessing its economic and environmental impacts; • SO 7 (“Expansion and updating of uniform rules on the national territory for the management of relations between operators and users in the water sector”): in-depth study of plant transformation aimed at installing consumption metering devices for each individual building unit; • SO 10 (“Effective planning and implementation of investments for a quality water service”): with reference to technical quality, rather than envisaging the extension of the initial set of indicators ARERA intends to “complete – also based on the results achieved in the first application phase – the set of indicators introduced”; • SO 11 (“Cost-efficient cost recognition in the integrated water service”): introduction of the reference to ARERA’s action to promote, among other things, the implementation of projects aiming at the recovery of energy and matter from sewerage sludge.
ARREARS Resolution 311/2019/R/IDR “Regulation of arrears in the Integrated Water Service” With the enactment of the final measure, including the attached REMSI (Regulation of arrears in the integrated water service), the directives for the management of arrears in the integrated water service in the national territory were adopted, thus concluding – after broad consultation (DCO 603/2017/R/IDR, 80/2018/R/IDR and 158/2019/R/IDR) – the process started in November 2016 with the opening of the procedure (Resolution 638/2016/R/IDR). Specifically, Resolution no. 311/2019/R/IDR, which is expected to be applied from 1 January 2020: • defines the end users that cannot be disconnected, identified as the beneficiaries of the social water bonus and the users for “Public use that cannot be disconnected” referred to in Resolution 665/2017/R/IDR (TICSI);
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• regulates the formal notice procedure, requiring the operator to send an amicable payment reminder prior to the formal notice; defining the timing of the process, including the final payment deadline; • regulates the procedures for restriction, suspension and deactivation and supply, defining their conditions, methods and timing. In particular, for resident domestic users, a phase of restriction of the supply with guarantee of the minimum vital quantity (50 litres/inhabitant/day) is foreseen before suspension. For this type of user, deactivation cannot be carried out except in the event of tampering with seals/flow limiters and failure to comply with the obligations for the recovery of past arrears in the previous 24 months; (i) lays down specific rules for condominium accounts, providing that no restriction/suspension/deactivation may be made against partial payments, provided that they are made in a single instalment within the deadline specified in the formal notice and equal to at least half of the amount due. If the condominium does not pay the balance within 6 months of the partial payment, the operator may restrict, suspend or deactivate the supply; (ii) sets out the situations in which the operator is required to ensure the payment in instalments of the amount in arrears and the arrangements for such payment; (iii) finally, it provides for automatic compensation in the event of non-compliance with the requirements.
NATIONAL PLAN OF PROJECTS IN THE WATER SECTOR Aqueducts Section With Resolution 51/2019/R/IDR “Initiation of the proceeding concerning the necessary and urgent interventions for the water sector for the definition of the “Aqueducts” section of the National Plan, referred to in article 1, paragraph 516 of Italian Law 205/2017”, ARERA renews and integrates the procedure set out in Resolution no. 25/2018/R/IDR on the necessary and urgent measures for the water sector for the purposes of defining the “aqueducts” section of the National Plan (referred to Italian Law no. 205/17), providing that it take due account of the recent provisions introduced by Italian Law no. 145/18 (Italian Budget Law 2019). In particular, ARERA considers it necessary to: • without prejudice to the investigative activities already carried out, define the most suitable methods for identifying synergies between the interventions to be included in the various parts of the National Plan, in particular continuing the coordination between the administrations involved to adopt consistent selection criteria based on the guarantees regarding the effectiveness and speed of execution of the interventions to be financed (Italian Law 145/18); • conduct further assessments in light of the renewed and strengthened focus that laws have placed on containing water loss (paragraph 153, art. 1 of Italian Law 145/18); • integrate the activities aimed at defining the “aqueducts” section of the National Plan with sensitivity analyses regarding tariffs in light of the completion of operations for the planned financing instruments; • taking into account the characteristics of the potential beneficiaries of public resources, assess the most suitable measures to ensure the management capacity of the operator to whom the management of the works financed by the National Plan will be entrusted, as a prerequisite for an effective use of the resources granted.
With the Resolution 252/2019/I/IDR, “First list of the necessary and urgent interventions for the water sector for the definition of the ‘aqueducts’ section of the National Plan, referred to in
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article 1, paragraph 516 of Italian Law 205/2017”, ARERA aim the purposes of defining a first excerpt of the aqueducts” section of the National Plan referred to Italian Law 205/2017, as subsequently supplemented by the provisions of Italian Law 145/2018. ARERA provided an initial cluster of projects that updated and integrated the list presented in Reports 268/2018/I/IDR and 538/2018/I/IDR. These projects were identified by the competent territorial entities as necessary and urgent for the achievement of the priority objectives of achieving adequate levels of technical quality, recovery and expansion of the water tightness and transport of water resources, dissemination of tools aimed at saving water in agricultural, industrial and civil uses. The list contains 26 projects for a total of € 80 million over the two- year period 2019-2020. Projects not selected for this first cluster, other projects that will emerge as priorities, as well as the continuation of the activities of the selected projects may be evaluated both for the inclusion in subsequent clusters of the “aqueducts” section of the National Plan and for the use of the Water Works Guarantee Fund referred to in article 58 of Italian Law no. 221 of 28 December 2015.
Resolution 425/2019/R/IDR “Regulation of the procedures for the disbursement of resources for the completion of the projects contained in Annex 1 to the Decree of the President of the Council of Ministers of 1 August 2019, concerning the ‘adoption of the first excerpt of the national plan of projects in the water sector – aqueducts section’, adopted pursuant to article 1, paragraph 516 of Italian Law 205/2017”. With the measure ARERA regulates the conditions, terms and methods of disbursement of the resources allocated for the completion of the projects referred to in the first excerpt of the National Plan for projects in the water sector – aqueducts section. The resolution provides for the establishment at CSEA of the Account for the financing of the projects of the National Plan, aqueducts section, with the aim of supporting the planning and completion of the projects. The subsequent CSEA Circular 37/2019/IDR provides the reference body and the implementing entity with the operating instructions and the related forms for the disbursement of the advance payment for the projects.
Resolution 512/2019/R/IDR “Start of the disbursement of resources for the completion of the projects referred to in Annex 1 of Italian Prime Ministerial Decree dated 1 August 2019 concerning “Adoption of the first excerpt of the National Plan of projects in the water sector – aqueducts section”. The resolution authorises CSEA to pay the first instalment of financing (advance payment of 40% of the total) for the construction of the works listed in the measure itself (23 out of the 26 works included in the first part of the plan). For the remaining works in the Plan excerpt, the authorisation for the payment of the first instalment is postponed to the verification of the complete fulfilment of the obligations envisaged.
Reservoir Section Opinion 160/2019/I/IDR “Opinion to the Minister of Infrastructure and Transport on the proposed decree of the President of the Council of Ministers for the adoption of the first section of the National Plan of interventions in the water sector, relating to the ‘reservoirs’ section, referred to in article 1, paragraph 516, of Italian Law 205/2017”. With this measure, pursuant to art. 1, paragraph 516 of Italian Law 205/17, ARERA offered a favourable opinion with comments on the proposal for a decree sent by the MIT, pointing out, however, that the proposal does not refer to the provision of Italian Law 205/17 for which the AGBs (and the other parties responsible for carrying out the measures), within 60 days of the date of entry into force of the decree itself, adjust their planning and programming in line with
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the measures envisaged in the National Plan, as well as the fact that the agreements (referred to in the proposed decree) do not include – for critical cases in the planning and management of the integrated water service – specific conditions aimed at balancing the need to quickly start financing the projects of the National Plan with that of ensuring their effective and sustainable implementation.
Water works guarantee fund Resolution 353/2019/R/IDR “Initiation of proceedings to define the procedures for the supply and management of the Guarantee Fund for water works, referred to in article 58 of Italian Law 221/2015, consistent with the criteria set out in the Italian Prime Ministerial Decree of 30 May 2019”. ARERA started to define the procedures for the supply and management of the Guarantee Fund for water works, referred to in article 58 of Italian Law 221/15 in line with the criteria set out in the Italian Prime Ministerial Decree of 30 May 2019, envisaging in a first phase: • the identification of the needs related to the new project financing operations; • the quantification of the tariff equalisation component, to be established under MTI-3, intended to feed into the fund; • the definition of the general elements necessary to govern the way the fund is managed; • the setting up of the Risk Assessment Committee at the CSEA, which is responsible for giving its opinion on the Fund’s operating procedures and on the proposals for projects to be covered by the guarantee. At a later stage, the procedures and terms for issuing guarantees, assessing individual applications and monitoring and verifying the development of the projects eligible for guarantees will have to be defined. DCO 368/2019/R/IDR “Definition of the arrangements for the supply and management of the Guarantee Fund for water works. General framework and first lines of action”. In the ARERA measure, in addition to illustrating the recognition of the needs connected to the new financing operations of the projects included in the categories listed in the Prime Ministerial Decree, it proposes uses and sources of financing of the Fund, defining the amount of the guarantees and the quantification of the tariff equalisation component aimed at financing it, foreseeing its establishment within the MTI-3. At first, the guarantees will be granted to cover needs requiring an effective increase in spending capacity compared to what had been planned. The amount of the guarantees given (of separate amounts depending on whether or not the beneficiary is subject to the regulation of ARERA) will depend on the rate of completion of the planned measures, the degree of capitalisation of the subject, the cost of recourse to debt, the operator’s local institutional structure and the strategic importance of the operation to be financed. ARERA foresees the calculation of a cost for the guarantee that the requesting operator will pay to CSEA and that, for regulated operators, will be included in the tariff. As already mentioned above, in order to pay into the Fund and cover its operating costs, Resolution 580/19 (MTI-3) established an equalisation component equal to 0.4 cents/€ per cubic metre. The end of the measure includes a number of procedural elements relating to the subjective requirements of applicants for eligibility for the Fund’s guarantees, the financial transactions accepted as collateral, the cases of termination of the credit line for which payment of the recognised take-over value must be provided and the related settlement procedures and the procedures for applying for the guarantee. Finally, the measure includes a schematic representation of the Fund’s operation and the organisational relations between ARERA and CSEA.
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Treatment sludge Resolution 20/2019/R/IDR “Launch of a fact-finding study of the methods for managing and exploiting treatment sludge”. A fact-finding study was launched into the methods for recovering and disposing of sewage sludge, providing for specific in-depth actions aimed at encouraging the adoption of further measures to accompany the transition to a circular economy in the wastewater treatment sector. The purpose of the survey is to collect data and information on the technologies currently available for the containment/use of the total quantity of sludge and on its transport, recovery and disposal costs. In addition, further details are planned regarding the third parties involved in the management of the sludge until its final destination, as well as any extra-regional or international movements. The study will end on 31 December 2019. Resolution no. 580/19 (MTI-3) introduced a new component aimed at recognising the higher cost of sludge disposal, with an exemption equal to 2% of the allowed cost. Memorandum 179/2019/I/com “Hearing of the Regulation Authority for Energy Networks and the Environment on the draft law “Delegation of powers to the government for the transposition of European directives and the implementation of other acts of the European Union – European delegation law 2018 (AS 944)”. During the hearing held on 7 May 2019 before the 14th Commission (EU Policies) that examined the Draft European Delegation Law 2018 (for the delegation to the government of the transposition of 24 European directives and other EU acts), ARERA reiterated its willingness to be involved in matters that fall within its area of responsibility. In particular, ARERA wishes to be informed both of the planned reform of the system of criteria for the acceptance of waste in landfills and the new organic rules on the use of sludge, which will amend the provisions of Italian Legislative Decree no. 99 of 27 January 1992 (use of purification sludge in agriculture). For both regulations, this is the implementation of Directive 2018/850, which is part of the so-called Package of measures on the circular economy. In this regard, ARERA agrees with the indications provided by the draft law, specifying: • that it recently launched a fact-finding exercise on the subject with Resolution 20/2019/R/IDR, with a view to promoting the dissemination of innovative technologies and the transition to a circular economy in the wastewater treatment sector; • with the introduction of Technical Quality regulations (Resolution 917/72017/R/IDR), to have introduced a specific indicator (M5 - Disposal of sludge in landfills) aimed at minimising the environmental impact deriving from the conveyance of wastewater. Based on these elements, ARERA suggests considering its involvement, both in the review of the system of criteria for the acceptance of waste at landfills and in the review of the rules set out in Italian Legislative Decree 99/1992. Waste business The Ronchi Decree and the Environmental Code The first comprehensive reform concerning the waste sector was carried out through Legislative Decree No. 22 of 5 February 1997 (the "Ronchi Decree") which pursued the objective of overcoming fragmented management, separating planning from operations, and reforming the system of remuneration of the service by applying a rate suitable to cover investment and operating costs. The regulatory frame has been recently changed after the approval of the Environmental Code, which has repealed the Ronchi Decree, by introducing important amendments aimed at promoting the development of competitive tendering of waste management service.
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In particular, the regulation contained in the Environmental Code is based on the following key principles:
• wastes are classified according to their origin as "urban waste", "special waste", "hazardous waste" and "non-hazardous waste";
• segregated waste collection, establishing collection targets in defined timeframes: 35 per cent. by 31 December 2006, 45 per cent. by 31 December 2008 and 65 per cent. by 31 December 2012;
• each Region shall be divided into ATO’s and a Waste District Authority shall be established for each ATO ("Autorità di Ambito Territoriale Ottimale" or "AATOs"), which is responsible for organising, awarding and supervising the integrated urban waste management services (collection, transport, recycling and disposal of urban waste);
• the AATO shall draft a district plan, in accordance with the criteria set out by the relevant Region;
• the Municipalities’ responsibilities relating to integrated waste management shall be transferred to the AATOs;
• a phasing-out of landfills as a disposal system for waste materials; and
• the order of priority of the procedures through which waste can be managed shall be the following: (i) preparation for re-use; (ii) recycling; (iii) recovery, including energy generation; and (iv) disposal.
The Integrated Waste Operator
The Ronchi Decree provided that the phases of collection and transport of urban solid waste be managed in a unitary and centralised way by the Municipalities belonging to the ATO, in accordance with one of the modalities provided for by the general laws and regulations regarding local public services. Conversely, recycling and disposal operations were subject to a regulated access regime, permitting possible forms of competition on the market.
The Environmental Code has partly modified the above-described regulatory framework, by providing that the award of the management of waste integrated cycle service is made in favour of a sole operator for each ATO by a competitive procedure to be organised by the AATOs pursuant to Art. 23-bis of Decree No. 112/2008, as recently amended by Art. 15 of Law Decree No. 135 of 25 September 2009 (converted in Law No. 166 of 20 November 2009) which sets forth the new legal regime in relation to the awarding of the local public services. For an analysis of such regime, please see below, under Regulations applicable to the supply of local public services: Water, Waste and Public Lightning Services.
Under the Environmental Code, companies producing waste are responsible and shall be charged for waste storage, transportation, recycling and disposal. Legislative Decree No. 205 of 3 December 2010, amending the Environmental Code rules concerning the paper-based waste management system, introduced the new electronic waste monitoring system (the "SISTRI"), which according to article 1 of Law Decree No. 96 of 20 March 2013, became operative by 1 October 2013. Also, with respect to waste management, from August 2011,
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according to the rules set forth by Legislative Decree No. 121/2011, some crimes concerning waste disposal have been introduced within Decree 231.
Waste Tariff Mechanism
The Ronchi Decree replaced the urban solid waste disposal tax (so-called Tassa per lo smaltimento dei rifiuti solidi urbani) with a tariff regime, aimed at fully covering costs, which was based on a "price cap" method and giving responsibility to the municipalities for determining the tariff on the basis of a reference value established according to the so-called "normalised method" provided for under Presidential Decree No. 158 of 27 April 1999 ("Decree No. 158/1999").
The Environmental Code has assigned to each AATO the task of determining the tariff to be paid to the service operators: such tariff shall be commensurate with the ordinary average quantity and quality of waste produced by square meter in relation to the use and types of activities carried out, on the basis of general parameters determined by an ad hoc regulation of the Ministry for the Protection of the Environment and Territory.
By 31 December 2009, the Ministry is required to adopt a regulation identifying the cost components for determining the tariff. Should the Ministry not adopt such regulation, on the basis of the provisions of Decree No. 158/1999, the previous regulations apply. As of the date of this Base Prospectus, this regulation has not yet been adopted and there is currently no clarity as to the timing for its adoption.
In July 2009, by Decision No. 38/2009, the Constitutional Court declared that the waste tariff pursuant to Article 49 of Legislative Decree No. 22 of 15 February 1997, also known as "TIA1" was by way of tax and therefore not subject to VAT. Following this decision, the Italian government approved Law Decree No. 78 of 31 May 2010, providing, under Article 14, paragraph 33 that "the provisions of Article 238 of Legislative Decree No. 152 of 3 April 2006 shall be interpreted in the sense of the non-taxation nature of the tariff provided therein". The disputes relating to this tariff which ensue after the effective date of this Decree fall under the jurisdiction of the ordinary judicial authority. Therefore, currently the TIA is subject to VAT, while an intervention by the legislator is awaited for the possible issue of refunds for the period in which TIA1 applied, together with the consequent reorganisation of the entire issue and the relative regulatory regime.
Article 14 of Law Decree No. 201/2011 has introduced, applicable from 1 January 2013, a new municipal waste tax, to be paid to each relevant municipality (the so-called "RES"). According to Article 1 of Law Decree No. 1/2013, the applicability of the new tax was postponed to July 2013. For 2014 the tax will be paid in four instalments: January, April, July and October.
According to Article 14, paragraph 29, of the Law Decree No. 201/2011, the Municipalities which have put in place measures for determining the specific quantity of waste conferred to the concessionaire of the urban waste management service, may enact regulations providing for the application of a tariff instead of the RES, to be paid directly to the concessionaire. The determination of such tariff will be provided by the above mentioned Decree.
Regulations applicable to the supply of local public services: Water, Waste and Public Lightning Services
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The integrated water service, the integrated waste management service and the public lightning service are economic local public services.
Legislation regulating local public services of economic importance was affected by the outcome of the law-repealing referendum held on 12 and 13 June 2011.
Subsequently, Article 4 of Law Decree No. 138 of 13 August 2011, converted into law by Law No. 148 of 14 September 2011, as amended and supplemented by Law No. 183 of 12 November 2011 (Decree 138/2011), re-introduced provisions analogous to those previously contained in the law provisions repealed by the aforementioned referendum. In particular, paragraph 32 of Article 4 provided for a transitory period regarding local public services awards:
(a) public services awarded by a local public authority, without any public tender, to "in house" companies 9 or, in any case, local public services assigned by the authority without any public tender to companies which do not meet the "in house" requirements as well as local public services not included among the cases provided by the paragraphs (b), (c) or (d) below should have terminated on 31 March 201210;
(b) local public services awarded to public-private companies, where the private partner has been selected through tenders which did not have as their object (i) the award of the position as shareholder and, at the same time, (ii) the award to the private shareholder of operational tasks connected to the management of same service, should have expired on 30 June 201211;
(c) local public services awarded to companies whose share capital is owned both by public and private partners, where the private partner was selected through competitive procedures, for the purposes, at the same time, of selecting the private partner and of assigning operational tasks to the private partner regarding the management of the service, shall expire at the expiry date provided by the relevant contract; and
(d) local public services which, as of 1 October 2003, had been awarded directly to companies in which public entities have a shareholding and listed in official stock exchanges as of the same date, as well as to their subsidiaries pursuant to Article 2359 of the Italian Civil Code, should have expired at the date provided by the relevant contract, upon the condition that the shares held by public entities (soci pubblici) in such companies as of 13 August 2011 or governed by a shareholders’ agreement (partecipazione sindacata) should have been reduced to a holding not exceeding 40 per cent. by 30 June 2013 and not exceeding 30 per cent. by 31 December 2015. Otherwise, the relevant awards should have terminated respectively on 30 June 2013 or 31 December 2015, with no need of a formal decision by the awarding authority.
By decision No. 199/2012, the Constitutional Court declared the constitutional illegitimacy of Article 4 of Decree No. 138/2011. The Court ruled that Article 4 was in breach of Article 75
9 i.e. local public services granted to (i) companies controlled 100 per cent. by the public entity and (ii) providing their main activity in favour of the same, having an overall amount higher than Euro 200,000.00 or, in any case, local public services assigned by the authority without any tender to companies which do not meet the "in house" requirements under (i) and (ii) above as well as local public services not included among the cases provided for by paragraphs (b), (c) and (d). 10 Term subsequently extended to 31 December 2012 11 Term subsequently extended to 31 March 2013
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of the Constitution because it had re-introduced provisions analogous to those provided under the previous legal and regulatory framework, which had been previously repealed by the referendum.
Following the repeal of Article 4 by decision No. 199/2012, on 20 October 2012, Law Decree. No. 179/2012 entered into force (the so-called "Growth Decree 2") which, however, does not apply to (i) gas; (ii) electricity and (iii) municipal pharmacies. Article 34 of this decree, with regards to local public services, provides that:
• public entities, before granting the concessions, shall publish on their websites a report clarifying the type of the award of the concession they have chosen (i.e. public bidding procedure for selecting a private company, public bidding procedure for selecting the private partner of a public-private company, direct award to wholly-owned public companies) and the relevant reasons underlying the choice;
• with reference to the concessions existing as of the date of entering into force of the decree (i.e. 20 October 2012) the aforementioned report has to be published by 31 December 2013;
• with reference to those concessions which do not provide for an expiry date, the competent awarding authority shall integrate the concession agreement with an expiry date; should the awarding authority fail in providing an expiry date, the relevant concession shall cease at 31 December 2013; and
• concessions granted to companies whose shares were listed on a stock exchange prior to 1 October 2003 (and to their subsidiaries) will terminate according to the terms originally indicated in the concession agreement or in the other relevant acts; if no specific expiry date is provided, the concession shall expire not later than 31 December 2020, and no formal resolution from the awarding authority will be required in this respect.
As to the procedures for the assignment of local public services, Article 34 of Decree No. 179/2012 does not contain any specific provisions, except for the general principle according to which the local public service must be assigned on a homogeneous territorial basis (ambiti territoriali ottimali e omogenei). Therefore, considering that:
(i) Article 23-bis of Law Decree no. 112 of 25 June 2008, (converted with amendments into Law no. 133 of 6 August 2008) has been repealed by the above-mentioned referendum; and
(ii) Article 113 of Decree 267/2000, for the part abrogated by Article 23-bis12, cannot be revived, according to the above-mentioned Constitutional Court decision No. 24/2011, for the time being public entities shall apply the principles and regulations provided for by the EU Treaty on the Functioning of the European Union and, in general terms, by EU Law and relevant case law. In this respect, the relevant authority shall alternatively award the new concession:
12 Please note that art. 23-bis had abrogated almost all of the relevant provisions of article 113 of Decree 267/2000. The only relevant provisions of 113 not expressly abrogated by article 23-bis provide for (i) the management of the public services plants and grid which (if separated from the management), has to be awarded by a public tender (ii) the relationship between public entities and the concessionaire of the public services, which has to be regulated by a service contract
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(1) to private companies, selected by means of a public bidding procedure;
(2) directly to public-private companies, should the private partner be selected through a tender having as its object (i) the award of the position as shareholder and, at the same time, (ii) the award to the private shareholder of operational tasks connected to the management of the service; and
(3) directly to companies wholly-owned by public entities if the sole purpose of such companies is to supply services to those public entities and if the awarding authority may exert over the concessionaire public company the same control that the authority exerts over its offices and departments (so called "in-house" companies).
Since the beginning of 2018, ARERA, in order to comply with Law No. 205 of 27 December 2017 ("State Budget for the financial year 2018 and multi-year budget for the three-year period 2018-2020"), which attributes to the Authority regulatory and control functions in the sector of urban and similar waste (articles 527-530), has started proceedings for the identification and adoption of regulatory measures both on quality and on tariffs. At the moment no new provisions have been approved.
The law of December 27, 2017, n. 205, attributed to the Authority functions of regulation and control of the cycle of waste, also differentiated, urban and similar, to be exercised "with the same powers and within the principles, purposes and attributions, also of a sanctioning nature, established by the law November 14, 1995, No. 481" and already exercised in other areas of competence:
Resolution 226/2018/R/RIF – Start of proceedings for the adoption of measures to regulate the quality of service in the waste cycle, including differentiated, urban and similar
The Authority starts a procedure for regulating the quality of the service in the waste cycle, including differentiated, urban and similar, and for the collection of functional data and information.
Resolution 716/2018/R/RIF – Start of proceedings for the establishment of a system for monitoring tariffs for the integrated waste management service, including differentiated, urban and similar and individual services that are management activities for the years 2018 and 2019
The Authority starts a procedure for the establishment of a tariff monitoring system for the years 2018 and 2019 regarding the waste cycle, introducing information obligations for service operators and registry requirements.
Regulation Year 2019 – ARERA Waste Services Activities
Following the consultation document 351/2019, on October 31, 2019 ARERA approved resolution 443/19/R/rif containing the first tariff method for the integrated waste management service 2018-2021 (MTR).
With reference to the MTR - Waste Tariff Method, it is specified that the new rules define the TARI fees to be applied to users in 2020-2021, the criteria for the costs recognized in the current two-year period 2018-2019 and the communication obligations.
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As in other sectors subject to regulation, in the new waste tariff method, the reference is made to data ex post and referable to certain accounting sources (financial statements) relating to year a-2 and applied to year a (inserting indications of adjustments that permeate the the whole algebraic structure of the method) and no longer with forecast data.
In the new method, ARERA applies a hybrid approach, borrowed from the other service regulations, such as electricity and gas, with a different treatment of capital and operating costs, namely:
- capital costs rewarded according to a regulation scheme of rate of return; - operating costs with the application of incentive regulation schemes and with the definition of efficiency objectives on a multi-year basis.
On the treatment and recovery and treatment and disposal phases, ARERA specifically indicates that, with subsequent measures, the criteria for determining the fees to be applied to the treatment and disposal plants will be assessed, indicating pending this assessment (to be carried out on the basis of criteria referred to in article 1, paragraph 527, letter g), of law no. 205/17) to apply, for TARI 2020, the fees for these activities as follows: a) in the presence of administered tariffs, the tariff approved and / or justified by the competent territorial body; and b) in all other cases, the rate charged by the owner of the system determined following negotiation procedures.
In this first phase of the tariff method, ARERA maintained the algebraic structure of the method established by DPR 158/1999, by inserting tariff factors corresponding to additional components for the determination of the fees, some of which are as follows: lim9it on the overall growth of tariff revenues ; asymmetric setting (four different templates that can be adopted by local authorities and managers in relation to service improvement objectives); sharing factor; introduction of the adjustment component both in relation to variable and fixed costs; introduction of two different rates of return on net invested capital (WACC) for fixed assets and for ongoing investments. With regard to the WACC of the integrated waste cycle for the 2020-2021 period, it is defined as 6.3%; to this value is added a 1% increase to cover the costs deriving from the time lag between the year of recognition of the investments (a-2) and the year of tariff recognition (a), so-called time lag.
The resolution 444/2019/R/rif defines the transparency provisions of the municipal and similar waste management service for the regulatory period 1 April 2020 - 31 December 2023, as part of the procedure started with resolution 226/2018/R/RIF. The scope of the intervention includes the minimum information elements to be made available through websites, the minimum information elements to be included in the collection documents (payment notice or invoice) and individual communications to users relating to significant changes in management.
Energy business
EU Energy Regulation: The Third Energy Package
The European Union is active in energy regulation by means of its legislative powers, as well as investigations and other actions carried out by the European Commission. In 2009, the European institutions adopted several directives and regulations aimed at completing the liberalisation of both electricity and gas markets (the "Third Energy Package"). In particular, the Third Energy Package contemplates the separation of supply and production activities from
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transmission network operations. To achieve this goal, Member States of the European Union may choose between the following three options:
• full ownership unbundling. This option entails vertically integrated undertakings selling their gas and electricity grids to an independent operator, which will carry out all network operations;
• Independent System Operator ("ISO"). Under this option, vertically integrated undertakings maintain the ownership of the gas and electricity grids, but they are obliged to designate an independent operator for the management of all network operations; and
• Independent Transmission Operator ("ITO"). This option is a variant of the ISO option under which vertically integrated undertakings do not have to designate an ISO, but need to abide by strict rules ensuring separation between supply and transmission.
The Third Energy Package also contains several measures aimed at enhancing consumers’ rights, such as the right: (i) to change supplier within three weeks and free of charge; (ii) to obtain compensation if quality targets are not met; (iii) to receive information on supply terms through bills and company websites; and (iv) to see complaints dealt with in an efficient and independent manner. The third energy package also strengthens protection for small businesses and residential clients, while rules are introduced to ensure that liberalisation does not cause detriment to vulnerable energy consumers.
Finally, the Third Energy Package provides for the creation of a European Union agency for the coordination of national energy regulators, which will issue non-binding framework guidelines for the national agencies. It is expected that this will result in more harmonised rules on energy regulation across the European Union.
As envisaged in the Third Energy Package, in March 2011 the Agency for the Cooperation of Energy Regulators ("ACER") began operations. ACER replaces and strengthens the European Regulators Group for Electricity and Gas ("ERGEG"). ACER coordinates the actions of the national regulatory authorities in the energy sector and its main responsibilities are:
• establishing and regulating the rules governing European electricity and gas networks;
• establishing and regulating the terms and conditions for access to (and operational security for) cross-border infrastructures where national authorities are in disagreement; and
• implementing the Ten-Year Network Development Plan ("TYNDP").
In Italy, the principles provided under the Third Energy Package (in particular, EU Directives 2009/72/EC, 2009/73/EC and 2008/92/EC), have been recently implemented by means of Legislative Decree No. 93 of 1 June 2011, published in the Official Gazette on 28 June 2011 (Legislative Decree 93/2011).
The main provisions of Legislative Decree 93/2011 include:
(i) unbundling of the Transmission System Operator (TSO). In the electricity sector, the unbundling between grid ownership and generation activity has been confirmed and the TSO is expressly prohibited from operating power generation plants. For the gas sector, an Independent Transmission Operator model has been adopted, with a vertically
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integrated ownership structure, more stringent functional separation rules and wider control and approval powers assigned to the ARERA;
(ii) integration of renewable energy sources generation into the electrical system more efficiently; and
(iii) exemption from the third party access ("TPA") obligation in respect of new interconnection infrastructure.
With reference to the electricity sector, the duration of the exemption from the TPA obligation (for a maximum of 50 per cent. or 80 per cent. of new capacity) will be set on a case-by-case basis and the exemption will elapse if the relevant works are not started or the relevant infrastructure has not entered into operation within the time limits set out in the relevant exemption measure. With reference to the gas sector, in addition to the time limit provided by the relevant exemption measure, the new rules provide for a 25 year cap for the duration of the exemption and for the activation of an open season procedure in order to assess the interest of third parties in the relevant infrastructure notwithstanding the TPA exemption.
Italian Energy Regulation
The Ministry for Economic Development ("MED") and the ARERA share the responsibility for overall supervision and regulation of the Italian electricity sector. In particular, the MED establishes the strategic guidelines for the electricity sector, while the ARERA regulates specific and technical matters. The ARERA, inter alia:
• sets electricity and gas distribution tariffs, as well as the price for previously regulated (or "captive") customers, which have not yet chosen a different supplier;
• formulates observations and recommendations to the Government and Parliament regarding the market structure and the adoption and implementation of European Directives and licenses or authorisations;
• establishes guidelines for the production and distribution of services, as well as specific and overall service standards and automatic refund mechanisms for users and consumers in cases where standards are not met and for the accounting and administrative unbundling of the various activities under which the electricity and gas sectors are organised;
• protects the interests of customers, monitoring the conditions under which the services are provided, with powers to demand documentation and data, to carry out inspections, to obtain access to plants and to apply sanctions, and determines those cases in which operators should be required to provide refunds to users and consumers;
• handles out-of-court settlements and arbitrations of disputes between users or consumers and service providers; and
• reports to the Italian Antitrust Authority (the "AGCM") any suspected infringements of Law No. 287 of 10 October 1990 by companies operating in the electricity and gas sectors.
Furthermore, according to Legislative Decree 93/2011, the ARERA establishes rules aimed at:
• achieving the best quality level in the electricity and natural gas sectors;
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• protecting vulnerable customers;
• removing obstacles that could prevent the access of new operators to the electricity and gas market.
In addition to regulation by the ARERA, the AGCM also plays an active role in the energy market in ensuring competition between suppliers and protecting the rights of clients to choose their suppliers.
Italian Electricity regulation
The regulatory framework for the Italian electricity sector has changed significantly in recent years due to the implementation of the previous European energy directives, including, in particular, Directive 2003/54/EC and Directive 2001/77/EC.
On 1 April 1999, Legislative Decree No. 79 dated 16 March 1999 (the "Bersani Decree") implementing Directive 96/92/EC, became effective in Italy. It began the transformation of the electricity sector from a highly monopolistic industry to one in which energy prices charged by generators will eventually be determined by competitive bidding and provided for a gradual liberalisation of the electricity market so that customers whose annual consumption of electricity exceeds specified amounts ("Eligible Customers") will be able to contract freely with power generation companies, wholesalers or distributors to buy electricity.
The Bersani Decree established a general regulatory framework for the Italian electricity market that gradually introduces competition in power generation and sales to Eligible Customers while maintaining a regulated monopoly structure for transmission, distribution and sales to Non-Eligible Customers. In particular, the Bersani Decree and the subsequent implementing regulations:
• as of 1 April 1999, liberalised the activities of generation, import, export, purchase and sale of electricity;
• as of 1 January 2003, provided that no company shall be allowed to generate or import, directly or indirectly, more than 50 per cent. of the total electricity generated in and imported into Italy, in order to increase competition in the power generation market;
• provided for the establishment of the Acquirente Unico (the "Single Buyer"), the company who shall stipulate and operate supply contracts in order to guarantee franchise clients the availability of the necessary generating capacity and the supply of electricity in conditions of continuity, security and efficiency of service, as well as parity of treatment, including tariff treatment;
• provided for the creation of the "Power Exchange", a virtual marketplace in which producers, importers, wholesalers, distributors, the operator of the national transmission grid, the Single Buyer and other participants in the free market, buy and sell electricity at prices determined through a competitive bidding process;
• provided for the creation of the entity that manages the Power Exchange (the "Market Operator" or "Gestore del Mercato"); and
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• provided that the activities of transmission and dispatching are reserved exclusively to the State and attributed under concession to the operator of the national transmission grid, while the activity of distribution of electricity is performed under a concession regime under the authority of the Ministry of Productive Activities.
In addition, Law No. 290 of 27 October 2003 required the reunification of ownership and management of the transmission grid. Law No. 239 of 23 August 2004 (the "Marzano Law") reorganised certain aspects of the electricity market regulatory framework, including the limitation of the "captive market" to households pursuant to Directive 2003/54/EC concerning common rules for the internal market in electricity and repealing Directive 96/92/EC.
Law Decree No. 73/2007, as enacted into law through Law No. 125/2007, adopted urgent measures to place into effect EU market liberalisation requirements, including the following:
• a requirement for separating corporate functions into distribution, on the one hand, and electric energy sales, on the other;
• powers are assigned to the ARERA to adopt measures for the functional separation (pursuant to EU Directives 2003/54/EC and 2003/55/EC) of the administration of electric and gas infrastructure from non-related operations for the purpose of ensuring infrastructural administration that is both independent and transparent; and
• as of 1 July 2007, domestic end users have the right to withdraw from their pre-existing electricity supply contracts according to the procedures established by the ARERA which allow them to select a different electricity provider. If the end user does not select a provider, domestic end users not supplied with energy on the open market are guaranteed supply by the distributor or the distributor’s affiliate. The responsibility for supplying such clients remains with the Single Buyer, a company formed pursuant to Article 4 of the Bersani Decree.
For those end users that decide not to purchase electricity on the open market, the regulations provide as follows: (i) households and small businesses that have fewer than 50 employees, lower than Euro 10 million of turnover, and low levels of electricity consumption may access a regulated market ("servizio di maggior tutela") for which the ARERA establishes the electricity tariffs; and (ii) all businesses not included among those described in the preceding point (i) have access only to the "safeguarded market" which guarantees the supply of electricity but typically at higher than market rates, to incentivise to this category of business to access the open markets.
ARERA 2020-2022 Strategic Plan
With resolution 242/2019/A, ARERA confirmed the strategic guidelines set out in the consultation document 139/2019/A that will guide the current term of the Authority in the period 2019-2021 and outlines the strategic objectives and main lines of action.
ARERA particularly focuses on: 1) the protection and awareness of the final customer, 2) the simplification of flows, 3) the orientation of developments and investments and 4) the innovation of the system to be achieved, including through experimental projects.
Electric Generation
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Law Decree No. 34 of 31 March 2011 (the "Omnibus Decree") liberalised the regime for electricity generation. In order to increase the level of competition in the market, the Omnibus Decree provided that, as of 1 January 2003, no single electricity generation company shall be allowed to generate or import, directly or indirectly, more than 50 per cent. of the total electricity generated in and imported into Italy.
Hydroelectric Generation
By way of Law Decree No. 83 of 22 June 2012 (the "Development Decree"), the Italian government issued certain regulations designed to facilitate the way in which tenders are carried out. More specifically, Article 37 of the Development Decree provides that five years prior to the expiration of a large water concession, the competent authority shall launch a public tender for the assignment, subject to the payment of consideration, of such large water concession, in accordance with local regulations and the fundamental principles of competition protection, freedom of establishment, transparency and non-discrimination. Such new concession shall be for a period of 20 years, up to a maximum of 30 years, depending on the required level of investment.
In addition, in relation to large water concessions which either have already expired or are due to expire earlier than 31 December 2017 (in relation to which the afore mentioned five-year limit would not be applicable), the new provisions have established a special transitional regime, under which the relevant tenders must be called within two years of the effective date of the implementing ministerial decree (as per Article 12, paragraph 2 of Legislative Decree No. 79 of 16 March 1999), and the new concession will start at the end of the fifth year following the original expiry date and in any case no later than 31 December 2017.
Article 37 of the Development Decree further establishes that the out-going concession holder has to transfer any new concession holder its relevant division. The consideration to be paid to the concession to the out-going concession holder shall consist of an amount previously agreed between the out-going concession holder and the relevant authority, to be expressly indicated in the tender notice. In order to compensate the out-going concession holder for any investments made on the plants, such amount has to be calculated taking into account (i) in respect of dams, penstocks, drains and pipes, the re-valued historical cost, reduced to take into account any public contribution received by the concession holder for the construction of such assets and the ordinary wear and tear, and (ii) in respect of any other assets of the plant, the market value, intended as the value of the new construction of the assets reduced to take into account ordinary wear and tear. If no agreement can be reached between the out-going concessionaire and the granting administration on the amount of the consideration, such amount shall be established by means of an arbitration procedure.
Promotion of Renewable Resources
In 1992, the Interministerial Price Committee, an Italian governmental committee, issued Regulation 6/1992 ("CIP-6"), which established incentives for new generation plants using renewable resources and for the sale of electricity produced from renewable resources. In November 2000, the MED issued a decree that transferred all energy produced from renewable resources under the CIP-6 regime to the Electricity Services Operator as of 1 January 2001.
Under current regulations, an electricity services operator is required to purchase all CIP-6 electricity generated by the CIP-6 producers in order to resell it to Eligible Customers and, since 2004, also to the Single Buyer. The Electricity Services Operator sells the so-called green
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certificates representing electricity from renewable resources purchased from CIP-6 producers ("Green Certificates").
The Bersani Decree provided that, starting in 2001, all companies producing or importing more than 100 GWh of electricity generated from conventional sources into the national transmission grid in any year must, in the following year, introduce into the national transmission grid an amount of electricity produced from newly qualified renewable resources (the "Renewable Obligation"), initially equal to at least 2 per cent. of the amount of such excess over 100 GWh, net of co-generation, self-consumption and exports (the "Green Certificates Quota" – that is, the amount of renewable energy such companies are required to produce). Electricity from renewable resources may be produced directly or purchased from other producers who have obtained tradable Green Certificates representing a fixed amount of electricity certified as generated from renewable resources.
On 6 April 2009, the Council of the European Union adopted the final text of a directive setting a common EU framework in the field of the promotion of energy from the renewable resources.
The main objective of the directive is the achievement of a 20 per cent. share of energy from renewable resources in the EU’s final consumption of energy by 2020. In light of this objective, for the first time, Member States are assigned mandatory individual targets for the share of renewable energy sources in final energy consumption. For Italy, this target has been set at 17 per cent. in comparison to the 5.2 per cent. it had been assigned in 2005. Pursuant to EU Directive No. 2009/28/EC and to the statutory criteria of Law No. 96/2010, in March 2011, the Legislative Decree No. 28/2011 on the development of renewable sources was passed. The Decree defines tools, technicalities and the criteria the incentives regime must be based on in order to achieve the 2020 renewables objectives. The incentive regime for the production of energy from renewable sources is currently governed by two Ministerial Decrees dated 5 and 6 July 2012 (the first fixes the feed-in tariffs for energy produced by photovoltaic plants and the second ruling governs incentives for energy produced by renewable sources other than solar power).
Amendments to Regulations Governing Green Certificates
In addition to (i) providing for an annual increase (0.75 per cent.) for the years 2007 to 2012 in the obligation to generate/import electricity from renewable resources as a percentage of the conventional electricity generated/imported in the preceding year and produced by conventional sources, (ii) establishing the incompatibility of the Green Certificate system with other incentives regimes and (iii) fixing the validity period of the Green Certificates in 15 years, Law No. 244/2007 (the so-called "Budget Law for 2008"), with reference to power plants coming in line after 31 December 2007, updated the rules on Green Certificates and reintroduced a support mechanism (recognition of a comprehensive rate) for electricity generation from renewable resources by certain small power plants.
Legislative Decree No. 28/2011 subsequently revised the matter, decreasing the percentages of obligations (the "Green Certificates Quota" – that is, the amount of renewable energy such companies are required to produce) linearly until 2015, set as the expiry date of the Green Certificates system.
The updated Green Certificate rules provided under the Budget Law for 2008 and Legislative Decree No. 28/2011:
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• differentiate recognised Green Certificates by source using co-efficients that are adjusted every three years;
• calculate the price of Green Certificates issued by the Electricity Services Operator (pursuant to Article 11(3) of the Bersani Decree) as the difference between Euro 180/MWh (value updated every three years) and the average annual price of electricity as established by the ARERA; and
• provide that, until the relevant national target set by the European Union has been met, at the request of the generator, the Electricity Services Operator can withdraw any Green Certificates (expiring that year) in excess in respect of those needed to meet the relevant obligation.
The above-mentioned MED Decree issued on 6 July 2012 pursuant to Legislative Decree No. 28/2011 defines new rules to access the incentive system from January 2013, as well as the related transitional system. In particular, with the aim of supporting electricity production from renewable sources, the Ministerial Decree of 6 July 2012 defines new incentives applicable to the production of electricity from sources such as wind, water, geothermal, biomass, biogas and bioliquids. The Decree is applicable to plants which: are new, fully rebuilt, re-activated, have been subject to an enhancement in power or have been refurbished, have a power output of at least 1 kW and that start operating (i.e. are connected in parallel to the electric system) after 31 December 2012.
Photovoltaic power plants
Photovoltaic solar plants benefit from a feed-in premium tariff on top of the price of the electricity generated (the so called "Conto Energia"). The Conto Energia has been regulated in previous years by several ministerial decrees (so-called "First, Second, Third and Fourth Conto Energia"). Currently, the incentive regime applying to solar plants is provided for by ministerial decree dated 5 July 2012 (so-called "Fifth Conto Energia"). The feed-in tariffs set forth under the Fifth Conto have a comprehensive nature, including both the incentive component and the remuneration of the electricity produced.
GSE S.p.A. (i.e., a state-owned company which promotes and supports renewable energy sources in Italy, "GSE") is entitled to conduct inspections on the plants and to revoke the incentives in case of discrepancy between the documentation and design submitted to the GSE within the application for incentives and the works realised as well as in case of false statements rendered by the operator to the GSE in order to achieve the incentives.
CO2 Emissions
In the framework of the Kyoto Protocol, in 2003, the EU adopted Directive 2003/87/EC (the "Emissions Trading Directive") establishing a scheme for greenhouse gas emission allowance trading. In October 2004, the EU also passed another directive, Directive 2004/101/EC (the "Linking Directive"), amending the Emissions Trading Directive to allow further flexible mechanisms for limiting greenhouse gas emissions. Both the Emissions Trading Directive and the Linking Directive have been implemented in Italy by Legislative Decree No. 216/2006.
Pursuant to the aforementioned European Directives, the power generation sector in Europe is required to participate in the European Union Emissions Trading System, a market-based system for reducing greenhouse gas emissions Operators are expected to reduce their emissions
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by 21 per cent. by 2020. On 1 January 2013, the third phase of implementation of the aforementioned Directives, to take place between 2013 and 2020, began. This phase envisages a series of major changes introduced by Directive 2009/29/EC and subsequent regulations in order to improve the efficiency, transparency and effectiveness of the system.
The main change regards the method for allocating emissions allowances. The free allocation of allowances will gradually be replaced by an auction system. The power generation sector will be required to purchase 100 per cent. of its allowances through auctions as from January 2020. During the final months of 2012, 120 million phase three allowances were sold through "early auctions". The allowances pertaining to Italy, Spain and Slovakia represent 9.4 per cent., 8.4 per cent. and 1.5 per cent., respectively, of the total allowances available at the European level for phase three. The proceeds of the auctions are managed by the Member States, which must, however, use at least 50 per cent. of the revenues to finance projects involving low carbon technologies (CO2 capture and storage, renewable resources, etc.). Another major innovation is the monetization of the allowances in the NER 300 (a financing instrument managed jointly by the European Commission, European Investment Bank and Member States) reserve by the European Investment Bank, the proceeds of which will be used to finance pilot projects in the innovative renewable resources field and in CO2 capture and storage technologies. The allowances (300 million European Union Allowances ("EUA"), i.e. the quotas allocated by the national allocation Plans within the EU Emission Trading Scheme ("ETS")) will be sold on the OTC market, regulated exchanges and through auctions. The sale of the first 200 million allowances was completed in November 2012. The remaining 100 million will be monetized subsequently by the European Investment Bank.
In response to the excess supply of allowances on the ETS market, the European Commission decided to postpone the sale of a portion of allowances to be auctioned to the end of the third phase in order to reduce short-term supply (the backloading option) and to set a structural reform of ETS in the long term. The European Parliament and Council were asked to amend the EU ETS Directive to formally enable the Commission to take such a step. On 10 December 2013 the European Parliament approved the proposal to amend the EU ETS Directive in order to clarify the power of intervention of the European Commission and to allow the provisional retirement of 900 million quotas from CO2 allowances. The European Council expressed on 16 December 2013 its approval adopting this amendment. Following this, the Committee for Climate Change approved on 8 January 2014 the backloading option for the provisional retirement of quotas for 2014-2016. The proposal is being examined by the European Parliament and Council.
Wholesale market
The Power Exchange is a marketplace for the spot trading of electricity between producers and consumers under the management of the Electricity Market Operator. It began operations on 1 April 2004. Producers can sell their electricity on the Power Exchange Market at the system marginal price defined by hourly auctions. Alternatively they can choose to enter into bilateral contracts and, in this case, the price is agreed with the other counterparty.
One of the most important participants on the Power Exchange Market is the Single Buyer, a company the sole quota holder of which is the Electricity Services Operator which is wholly- owned by the Italian State. The Single Buyer has the goal of ensuring continuous, secure, efficient and competitively-priced electricity supply to clients remaining in the "Universal Service" regime (consisting, since 1 July 2007, of residential clients and small business clients that have not chosen a supplier in the market), in order to enable them to reap the benefits of
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the electricity liberalisation process. The Single Buyer is the largest wholesaler in the market, purchasing about 30 per cent. of the total national demand. The Single Buyer purchases electricity on the Power Exchange Market through bilateral contracts (including contracts for differences) with producers, and imports electricity.
The total payments by the Single Buyer to electricity producers for its purchases, plus its own operating costs, must equal the total revenues it earns from energy sales to the retail companies operating within the regulated market under the regulated price structure. As a consequence, the ARERA adjusts reference prices from time to time to reflect the ones actually paid by the Single Buyer, as well as other factors.
Other participants in the Power Exchange Market are producers, integrated operators, wholesalers and some large electricity users. The ARERA and AGCM constantly monitor the Power Exchange to ensure that it reaches the expected goals: improving competition between electricity producers and enhancing the efficiency of the Italian electricity system.
The electricity generated can be sold wholesale on the organized spot market ("IPEX"), managed by the Energy Markets Operator ("EMO"), and through organized and over-the- counter platforms for trading forward contracts. The organized platforms include the Forward Electricity Market ("FEM"), managed by the EMO, in which forward electricity contracts with physical delivery are traded, and the Electricity Derivatives Market ("IDEX"), managed by Borsa Italiana, where special derivative instruments with electricity as the underlying asset are traded.
Generators may also sell electricity to companies engaged in energy trading, to wholesalers that buy electricity for resale at a retail level, and to the Single Buyer, whose duty is to ensure the supply of energy to enhanced protection service customers.
In addition, for the purpose of providing dispatching services, which is the efficient management of the flow of electricity on the grid to ensure that deliveries and withdrawals are balanced, electricity generated may be sold on a dedicated market, the Ancillary Services Market ("ASM"), where Terna S.p.A. ("Terna") procures the required resources from producers. The ARERA and the Ministry for Economic Development are responsible for regulating the electricity market. More specifically, with regard to dispatching services, the ARERA has adopted a number of measures regulating plants essential to the security of the electrical system. These plants are deemed essential based on their geographical location, their technical features and their importance to the solution of certain critical grid issues by Terna. In exchange for being required to have electricity available and providing binding offers, these plants receive special remuneration determined by the ARERA. Since the launch of the market in 2004, the regulations have provided for a form of administered compensation for generation capacity. In particular, plants that make their capacity available for certain periods of the year when demand is typically high receive a special fee.
In August 2011, the ARERA published a resolution that establishes the criteria for introducing a market mechanism for compensating generation capacity that replaces the current administered reimbursement. This mechanism involves holding auctions through which Terna will purchase from generators the capacity required to ensure that the electricity system is adequately supplied in the coming years. The initial auctions will be held in 2013, with producers agreeing to make their capacity available starting from 2017.
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In order to cope with emergencies in the gas system, such as the one that occurred between 6 February 2012 and 16 February 2012, Decree Law 83/2012, ratified by Law 134 of 7 August 2012, required the identification, on an annual basis from the 2012-2013 gas year, of thermal generation plants that can contribute to the security of the system by using fuels other than gas. Such plants, which are different from those essential to the electrical system, are entitled to reimbursement of the costs incurred in ensuring availability in the period from January 1 to March 31 of each gas year on the basis of the procedures established by the ARERA.
Distribution
The Bersani Decree provides that distribution services shall be performed on the basis of concessions issued by the former Ministry of Industry (now the MED). The current distribution companies will continue to perform that service on the basis of concessions issued by the Ministry of Industry in 2001, expiring on 31 December 2030.
The distribution companies are required to connect to their networks all parties who request connection, without compromising the continuity of the service and in compliance with the applicable technical regulations and provisions.
Moreover, the ARERA set a strict regulation concerning functional unbundling in order to guarantee the independence between the separated activities.
Efficiency in the end usage of energy
The distribution companies of electricity are required by Decree Bersani to undertake energy efficiency measures for the final user that are in line with pre-defined quantity targets fixed by ministerial decree. The companies that achieve such energy saving targets are entitled to receive, from the regulator of the electricity market, the Energy Efficiency Certificates ("TEE"), also called "White Certificates", (i.e. an incentive mechanism to save energy, into force starting from 1 January 2005) and to sell such certificates, by means of bilateral contracts or on a specific market instituted and regulated by GSE in agreement with the ARERA, to (other) companies who cannot meet their targets.
The foregoing incentive mechanism was regulated by certain Decrees of 20 July 2004, subsequently amended and updated in 2007, which set national energy savings targets for the period 2005-2012. The targets must be achieved each year by distribution companies.
To demonstrate that they have achieved their targets and avoid penalties, distributors must deliver a number of certificates at least equal to a specified percentage of their requirement to the ARERA by May 31 of each year.
The ARERA covers part of the costs incurred to achieve the target through a rate subsidy that in 2012 was equal to Euro 86.98 per toe (Ton Oil Equivalent) for each certificate delivered.
Through its Decree of 28 December 2012, the MED set new and rising energy savings targets for the 2013-2016 period.
In addition, for the 2013-2014 period, only the minimum percentage achievement obligation has been reduced from 60 per cent. to 50 per cent. The Ministry established that the residual obligation can be covered over the subsequent two years (rather than in the following year, as provided for under the previous Decrees).
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The Decree also re-modulated the criteria that the ARERA must apply in determining the rate subsidy.
Furthermore, through its decree of 28 December 2012, implementing Legislative Decree 28/2011, the Ministry for Economic Development introduced specific incentives to promote the production of thermal energy from renewable resources, as well as small scale energy efficiency initiatives.
The incentives, for which both government entities and private parties are eligible, are paid by the GSE in equal annual instalments for a maximum of five years. Eligible projects include improvements to the building envelope (government entities only) as well as the installation of heat pumps, thermal solar collectors and electric heat pump water heaters. Access to the incentives requires meeting certain minimum requirements, broken down by type of intervention.
The decree also charges the ARERA with specifying rates for the use of electric heat pumps with a view to encouraging energy efficiency and the reduction of polluting emissions.
After more than two years of waiting, finally, in April 2017, the new decree on the White Certificates came into force, implementing the provisions of Legislative Decree No. 28 of 3 March 2011 and Decree Law No. 102 of 4 July 2014. According to the decree, the national objectives to be achieved in the period 2017-2020 through the mechanism of the White Certificates and the White CAR Certificates are the following:
• 7.14 million TEP of primary energy in 2017;
• 8.23 million TEP of primary energy in 2018;
• 9.71 million TEP of primary energy in 2019;
• 11.19 million TEP of primary energy in 2020.
The goals for after 2020 will have to be defined by an interministerial decree to be issued by 31 December 2019. The 2017-2020 objectives can be achieved through:
• the interventions associated with the issue of White Certificates during the reference period;
• energy savings from high efficiency cogeneration (CAR) associated with the issue of White Certificates during the reference period (excluding those withdrawn by the GSE);
• efficiency measures carried out within the Ministerial Decree No. 106 of 20 May 2015, concerning the regulation for the tender criteria and for the evaluation of the offer for the assignment of the natural gas distribution service and associated with the issue of White Certificates during the reference period;
• interventions already facilitated under the White Certificates mechanism which, even after the end of the useful life, continue to generate savings.
These are the main new features introduced:
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• abolition of the analytical evaluation method: the decree provides only a new final method (called PC) and a new standardized method (called PS);
• new definition of baseline and additionality concepts;
• the minimum size of the projects is different: the standardized projects must have generated, during the first 12 months of the monitoring period, an additional savings share of no less than 5 TEPs. While the final projects must have generated, during the first 12 months of the monitoring period, an additional savings share of not less than 10 TOE;
• the delivery of the White Certificates is carried out on the basis of the actual reporting of the savings for a maximum of years equal to the useful life (U). Table 1 of Annex 3 to the decree contains a non-exhaustive list of the types of eligible projects and the related useful life values, distinguished by the form of energy saved;
• the type of Certificates returns to be of four types: Type I, II, III, and IV securities. The Type II-CAR, Type V, Type IN and Type E.
ARERA has been called several times in the course of 2017 and 2018 to intervene, initially for the application of the new legislative provisions and, downstream of the important implications on the market in terms of price increase, with revisions of the regulation to help regaining the balance.
a) Resolution 435/2017/R/Efr - Definition of the tariff contribution to cover costs incurred by the electricity and natural gas distributors subject to the obligations within the framework of the mechanism of energy efficiency certificates
The resolution to revise the rules for determining the tariff contribution granted to electricity distributors satisfying the energy saving obligations in the framework of the energy efficiency certificates (TEE) mechanism, for the years of obligation from 2017. In more detail:
• the so-called relevant session reference price determined by the average price, weighted according to the amount of the transactions performed in each session and concluded at a price within a range of ±12% compared to the relevant reference price of the previous session has been introduced, to determine the contribution;
• the reference contribution has been defined (formerly estimated contribution) taking into account the weighted average (on market transaction volumes and concluded through bilateral agreements) of the last two final contributions, providing a temporary one for the year of obligation 2017, which is why a higher weighting has been given to the 2016 final contribution compared to that of 2015;
• the parameters that constitute the k coefficient have been changed, which is applied to the difference between the reference contribution and the trade prices on the market;
• the tariff contribution to be provided on the occasion of the new annual expiry date for achieving the objectives by 30 November of each year has been defined, proceeding with the provision in advance based on the final contribution of the previous year, to apply to a limited target amount for each distributor (40% of the specific target for the
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year of the obligation and 75% of the residual amount of targets for previous years of obligation);
• the absence of limits to retaining TEEs in owned accounts has been confirmed, without envisaging an expiry date for them.
With regard to the application of the accruals basis, initially introduced from the year of obligation 2017, it has been postponed with subsequent measure 634/2017/R/efr of 15 September 2017:
• as regards certificates relating to remaining targets for the year of obligation 2017, the previous cash basis applies;
• as regards, on the other hand, certificates relating to the remaining targets for the years of obligation between 2018 and 2020, the accruals basis will only apply to portions of them, gradually and uniformly increasing in time.
The number of certificates to which the accruals basis apply will be quantified by the application of the parameter (0.25, 0.5 and 0.75 respectively) to certificates delivered by distributors subject to the obligations to apply to compensation for previous years of obligation. For certificates relating to the remaining portions of each remainder, the cash basis will apply instead.
The full application of the accruals basis will only be reached with reference to the remaining targets for the years of obligation subsequent to 2020.
Given that e-distribuzione has proposed an extraordinary appeal to the President of the Republic against Resolution 435/2017/R/efr, notified to ARERA on 11 October 2017, with Resolution707/2017/C/efr of 26 October 2017, the Authority has therefore decided to propose objecting to said appeal.
The difficult conditions that occurred in the market for energy efficiency certificates in 2017 and at the beginning of 2018, despite the various interventions by ARERA, led the MiSE to draw up a draft decree replacing the decree of 11 January 2017. The new decree, still awaiting publication, received a positive opinion from ARERA on the condition of some changes related to the determination of the tariff contribution, TEE not deriving from the projects, final debits to customers, information on GME (Opinion 265/2018/I/EFR).
With provision 487/2018/R/EFR of 27 September 2018, the Authority updated the criteria for determining the tariff contribution paid to distributors complying with energy saving obligations, in consideration of the changes introduced by interministerial decree of 10 May 2018, updating the previous interministerial decree of 11 January 2017, as well as the changes in the mechanism made in recent years. As a result of the resolution, the update of the Regulations for bilateral transactions and the TEE Market Rules was approved, as proposed by GME (Resolution 501/2018/R/EFR).
In the 2019, with the determination 209/2019/R/efr ARERA approved the implementation methods, prepared by the GSE, referred to in article 14-bis, paragraphs 6 and 8, of the interministerial decree of 11 January 2017 on TEE not corresponding to projects.
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With the determination 273/2019/R/efr, ARERA approves the update of the Regulation of bilateral TEE transactions prepared by GME in the manner provided by the previous Regulation, pursuant to resolution 209/2019/R/efr
The difficult situation of the market in white certificates has led some operators, including Acea, to challenge the legislation, ministerial decree of 10 May 2018, and the consequent ARERA regulations. The TAR responded to this adverse action by accepting the appeal and cancelling the Ministerial Decree of 10 May 2018 in the part in which it introduces the cap to the tariff contribution and all Arera resolutions deriving from it (487/2018/R/ EFR, 501/ 2018/ R/EFR, 209/2019/R/EFR and 273/2019/R/EFR).
With the determination 529/2019/R/efr, ARERA started a procedure for the reform of the tariff contribution to be paid to distributors complying with energy saving obligations under the TEE mechanism, in execution of the Lombardy Regional Administrative Court ruling no. 2538/2019. The provision also confirms some aspects of the previous regulation, following the same ruling.
The Tariff structure for transmission, distribution and metering
The ARERA established a tariff regime that came into effect on 1 January 2000. This regime replaced the "cost-plus" system for tariffs with a new "price-cap" tariff methodology. The price-cap mechanism sets a limit on annual tariff increases corresponding to the difference between the target inflation rate and the increased productivity attainable by the service provider, along with any other factors allowed for in the tariff, such as quality improvements. Under the price-cap methodology, tariffs will be reduced by a fixed percentage each year encouraging regulated operators to improve efficiency and gradually passing savings onto end customers.
By way of Resolution ARG/elt no. 199/11, the ARERA adopted the consolidated text of provisions to regulate the transmission and distribution of electricity ("TIT") and the consolidated text of provisions regulating the supply of the Electricity Metering Service ("TIME") for the fourth regulatory period (2012-2015).
In relation solely to the tariff adjustment for metering services, variations with respect to the previous regulatory period were included in the return on invested capital (set at 7.6 per cent. per annum), in the value of the X-factor (the coefficient of recovery for efficiency imposed by the regulator, set at 7.1 per cent. per annum) and also in revenue equalization for low voltage metering services. With reference to the distribution service, many of the tariff regulation schemes already in force during the previous regulatory period were maintained, in particular:
• the adoption of tariff decoupling, which requires a mandatory tariff to be applied to end users and a reference tariff for the definition of revenue restrictions, specific by operator calculated on the basis of the number of users ("PoD");
• the application of the profit-sharing method for the definition of initial operating cost levels to be recognized in the tariff;
• the updating of the tariff quota covering operating costs through the price-cap method, setting the annual objective for increased productivity (X-factor) at 2.8 per cent. for distribution activities;
• the evaluation of invested capital using the re-valued historical cost method;
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• the definition of the rate of return on invested capital through weighted average cost of capital ("WACC") (the rate set for 2015-2016 is 6.4 per cent. for investments made up to December 31, 2011; as to the investments made starting from 2012, the relevant rate of return on invested capital has been increased by 1.0 per cent.; and
• the calculation of depreciation on the basis of the useful lives valid for regulatory purposes.
The rules envisage incentives, using differentiated WACCs (+1.5/+2.0 per cent.) and for a minimum of eight years to a maximum of twelve, for specific types of investments in the distribution network, such as those relating to the construction of new transformer stations, investments in replacing existing transformers and smart grids, renewal and strengthening of the medium voltage networks in the historic centres, energy storage.
At the end of 2014, ARERA commenced a process of updating the calculation methodology of the WACC for the regulatory period starting from 2016. According to the guidelines expressed in the document commencing the process, ARERA would introduce certain periodical adjustment mechanisms related to the so-called exogenous shocks contributing to the determination of the rate of return on the invested capital, such as risk free rate and inflation, while specifically fixing the remaining variables (so-called endogenous shocks, such as the industry system risk and the Debt-to-Equity ratio) for each regulated segment.
In 2015, a large number of resolutions were approved resulting in the revision of the current legislation on the tariffs of transmission, distribution and metering of electricity for the period 2016-2023.
Resolution 654/2015/R/eel – Tariff regulation on electricity transmission, distribution and metering services, for the regulation period 2016-2023.
The resolution approves the "Consolidated Code on rules and regulations for electricity distribution and transmission services" (TIT), the "Consolidated Code on rules and regulations for electricity metering services" (TIME) and the "Consolidated Code on economic terms for the provision of connection services" (TIC), coming into effect from 1 January 2016.
In particular, the new rules and regulations for calculating tariffs in the new regulatory period, the result of a complex consultation process with the publication of numerous documents (including 5/2015/R/eel; 335/2015/R/eel; 446/2015/R/eel and 544/2015/R/eel):
• extended the duration of the period to 8 years (2016-2023), divided into two half- periods of 4 years each: NPR1 (2016-2019) and NPR2 (2020-2023);
• define the criteria for calculating the recognised cost (operating, capital and depreciation);
• provided for the new fee structure.
In particular, with reference to the transmission tariff, the ARERA:
• introduced the binomial cost tariff structure for the transmission service (CTR) applied by Terna to distributors at the interconnection points with an energy component and a power component calculated using the average maximum
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monthly power withdrawn from interconnection points as a driver, considering only the net energy withdrawn from the national grid (RTN);
• confirmed the same structure, in force also in the last regulatory period, for the TRAS tariff applied by distributors to end users;
• the equalisation mechanism of transmission costs based on the recognition of higher costs for the distributor, deriving from the difference between the above- mentioned fees, has been reintroduced.
Concerning the tariff of reference TV1(dis), allocated to cover distribution and marketing costs, the ARERA confirms the application of a monomial fee, on the basis of the number of withdrawal points, and therefore independent of the service volumes supplied, differentiated by voltage levels, except for types of contracts for public lighting users and public LV electric vehicle recharging, the fee of which is based on a tariff expressed in euro cents/kWh.
There is no structural change to the obligatory distribution tariff applied to non-domestic end users, nor to the equalisation mechanism of distribution revenues (inclusive of bi-monthly advance payments).
With reference to the regulation of the metering service, as well as defining the criteria for calculating the recognised cost and the remuneration tariffs of distributors providing the service, the measure also requires that:
• the obligation of data gathering is introduced for the subject responsible for measuring the actual peak demand in the month divided into bands, when possible for that meter;
• further in-depth considerations are made concerning the hypothesis of evolution of the metering service regulation, with the aim of defining the general reform by July 2016.
In 2019, with the Resolution 126/2019/R/eel – Start of procedure for the update within the period of the regulation of the tariffs and of the quality of the transmission, distribution and measurement of electricity, ARERA started a procedure for the formation of measures relating to the infra-period update (2020-2023) of the regulation of tariffs and quality for the transmission, distribution and measurement of electricity.
Regarding the Totex approach, with the consultation document 683/2017/ R/eel, the Authority highlighted the need to adopt a path of preparatory activities for the introduction of the Totex method that will be longer than the initial starting on 2020. Furthermore, the distributors have proposed that the Totex approach be applied by the 2024 to ensure the necessary graduality in the introduction of the new approach, also taking into account the differences between the starting points in the different activities, in particular with reference to the planning with forward-looking mechanisms. The Authority provides for the introduction of the new tariff logics starting from next regulatory period (2024), meanwhile the infra-period update of the tariff regulation will have as its object the review of the operating cost base and the productivity recovery rate (Xfactor) for the NPR2 half-period, including the costs of the 2G measurement service.
With Resolution 568/2019/R/eel – Update of the tariff regulation of electricity transmission, distribution and metering for the 2020-2023 interim regulatory period – and the several consultation documents and requests for information before, ARERA updated the tariffs and
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the quality of electricity transmission, distribution and metering for the 2020-2023 regulatory period. For aspects relating to distribution and metering, it envisages:
• the recognition of operating costs in the 2020-2023 interim period, taking as a reference the operating costs for the year 2018 and establishing a symmetrical distribution between enterprise and users of the productivity recovery made in the first interim period (2016- 2019);
• the activation of the sharing of net revenues from the use of the electric power infrastructure for purposes additional to electric power service;
• the establishment of a mechanism for the recognition of non-collectable receivables in the event of situations of exceptional arrears relating to the network tariff portion, but postpones its definition to a subsequent measure; • the promotion of new aggregations between distribution companies;
• the possibility to achieve an increase in the rate of return on invested capital upon request and in a single solution as envisaged in the TIT of 2008-2011 and 2012-2015 (respectively, for the first period, in article 11 and, for the subsequent period, in article 12);
• the extension of the discounts provided for changes in power requested by domestic customers, and in 2020 the method of operation of an equalisation mechanism will be defined with regard to the discounts provided in the period 2016-2019;
• the gradual application over the period of the reactive energy fees;
• the extension of the current rules applied to vehicle recharging points open to the public until the end of the regulatory period;
• the remodulation of the calculation of interest on arrears due to CSEA.
Resolution 583/2015/R/com – Rate of return on net invested capital for infrastructure services in the electricity and gas sectors: criteria for calculating and updating.
The resolution defines the procedure for calculating and updating the rate of return on net invested capital (weighted average cost of capital or "WACC") for regulated infrastructure services, unifying all the calculation parameters except for those specifically for single services, including parameter ß which expresses the specific non-diversifiable risk level and the weight of the equity capital and interest-bearing debt used for weighting (D/E ratio).
The revision of the procedure aims to define a more transparent and predictable regulatory framework and prevent differences in the rates of return of single services being affected by the specific condition of Italian financial markets. The weighted average cost of capital formula is still used as reference but some changes in their components have been introduced. In particular, for the determination of the risk-free rate of return (risk-free rate, RF), it has been replaced the previous references to the Italian market (BPT to 10 years) with references choosen among the European countries with high ratings (government bonds to 10 years - Germany, Belgium, the Netherlands and France) considered at "zero risk" level compared with Italy. The risk-free rate, as defined above, is adjusted by introducing a new component called "Country Risk Premium" (CRP) that represents an additional rate to cover the risk factors of the Italian market compared to the best European Countries financial performers: this
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addendum is related to both equity and debt components of the WACC. With regard to the rate of return on equity, the choice of the regulator is to recalculate this indicator as difference between the "Total Market Return" and the Risk Free Rate considering the inversely proportional correspondence between the two indicators. The cost of debt is revised downward in consideration of changes in its individual components as mainly Risk Free Rate.
The duration of the WACC regulatory period is six years (2016-2021), introducing an intra- period updating mechanism. The measure therefore indicates the formula to be used in the calculation and the specific values of the basic parameters in force as at 1 January 2016, except for parameter ß for the electricity sector, established by a subsequent regulation (Resolution 654/2015/R/eel – Annex D).
At the end of 2018 and for the second half of the WACC regulatory period of electrical and gas, certain parameters (such as the Risk Free Rate and the Country Risk Premium) will have to be reviewed ahead of the revision of the tariffs for the period 2019-2022.
Resolution 639/2018/R/COM – update of the remuneration rate of the invested capital for infrastructural services of the electric and gas sectors, for the years 2019-2021
With Resolution 639/2018 / R / COM of 6 December 2018, ARERA updates the values of the parameters for calculating the rate of return on net invested capital (WACC) for the three-year period 2019-2021, setting a value of 5.9% for the distribution service.
In 2019, the Authority updated the Integrated Text for the calculation and the rate of return of investments in electricity and gas infrastructure for the period 2016-2021 (TIWACC). Indeed, Resolution no. 570/2019/R/gas confirmed the rate of return on gas distribution at 6.3% until 2021 and aligned the rate of gas metering with that of distribution in the years 2020-2021, reducing it by 0.5% (from 6.8% in 2019 to 6.3%).
Resolution 646/2015/R/eel – Consolidated Code on the output-based regulation of electricity distribution and metering services, for the regulation period 2016-2023.
The resolution approves the "Consolidated Code on the output-based regulation of electricity distribution and metering services, for the regulation period 2016-2023" (TIQE), in force from 1 January 2016.
The text, the result of a complex consultation process, contains four separate documents (5/2015/R/eel; 48/2015/R/eel; 415/2015/R/eel and 544/2015/R/eel), in III parts:
I. Regulation of the continuity of the distribution service and voltage quality. These are the main elements that have been introduced:
(a) for the duration of the outages:
• the mechanism of bonuses/penalties on the duration of the outages has been kept, introducing an allowance of ±10per cent. on the objective value;
• experimental incentive regulation for the 3-year period 2017-2019 on the duration of the outage with prior warning, of a medium and low voltage origin (measure to be adopted by 30 June 2016);
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• progressive alignment of the standards on prolonged outages to that in force today for city centres: from 2020 eight hours for all low voltage users and 4 hours for all medium voltage users;
(b) for the number of outages without long or short-term warning: confirmation of the bonuses/penalties regulation with long-term objectives transferred to the end of the new regulatory period for long-term objectives;
(c) on the subject of voltage quality, the foundations were laid for introducing a specific standard on transient outages and loss of voltage for medium voltage customers and for new initiatives concerning the conformity of the effective supply voltage value for low voltage users.
II. Regulation of specific and general commercial quality levels. These are the main elements that have been introduced:
(a) reduction of maximum response times for services requested by end users concerning the estimation and performance of work;
(b) development of fast estimate services (via telephone, managed by seller);
(c) introduction of some basic criteria for drawing up agreements between distributors and applicants for mass connection and activations.
III. Selective promotion of investments for distribution networks. This part aims to create incentives for the appropriate development of investments in distribution networks, providing guidelines for the choices made by enterprises for investments that maximize net system benefits, through output-based incentives mechanisms, developed on the basis of criteria of selectivity.
In particular, aspects are considered that represent the main innovative elements of the new rules and regulations, concerning both the innovative functions of the medium voltage distribution networks in areas with a high penetration of energy generated from renewable sources, as well as the evolution of distribution networks in urban areas, with particular reference to the development of the capacities of backbones in buildings.
With reference to the Regulation for the tariff settlement of the end user market, two relevant determinations were issued.
In the 2019, with resolution 566/2019/R/eel – Approval of the Integrated text of the output- based regulation of electricity distribution and metering for the 2020-2023 interim period, issued following consultation no. 287/2019/R/eel, ARERA updated the TIQE for the 2020- 2023 interim period. Specifically, it envisages:
• the confirmation of the year 2023 for the achievement of continuity target levels, granting them only to the areas with the worst levels of continuity;
• the introduction of a special incentive scheme for critical territorial areas;
• the establishment of a mechanism of regulatory experiments to help improve the quality of service;
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• the introduction of the recording of the number of meters replaced due to faulty display;
• from 2021 comparative publication also for voltage dips;
• the limitation of the premium on the individual project to improve the resilience of the networks to a maximum value equal to the cost of the project itself.
Resolution 582/2015/R/eel – Reform of network tariffs and tariff components covering general system charges for domestic electricity users. Concomitant update of cost compensation for domestic customers in conditions of economic hardship.
The resolution concludes the tariff reform process for network services and general system charges for domestic LV users, as provided for by Legislative Decree 102/14 which provides for the gradual replacement of the current progressive price structure, characterized by a unit rate that increases as electricity withdrawals increase.
In coherence with the provisions of the same decree, the ARERA requires that:
(a) the current bracketed structure will remain in force for all of 2016 but, for the tariffs of transmission, distribution and metering services only, the rates will be recalculated to reduce the amount of the cross-subsidy in force today between low consumption resident customers and non-resident customers who consume more energy, by at least 25per cent.;
(b) from 1 January 2017, however:
• the network tariff will become non-progressive and it will be the same for all domestic customers, structured as a flat rate (€/POD/year) for metering and marketing, in a power rate (€/kW/year) for distribution and an energy rate (€/kWh) for transmission; • the fees covering general system charges will be redefined to limit the number of annual consumption brackets to two; • finally, from 1 January 2018 the progressive structure of the components covering general system charges will also be replaced.
Concerning the actions planned in previous consultations, aimed at promoting a more attentive use of the contractual demand by customers, the ARERA requires that, starting 1 January 2017:
(a) contractual demand levels that are higher than those current used will be introduced;
(b) when the regulations of the above letter come into force, for a period of at least 24 months, the amount of connection contributions and flat rates the customer pays the distributor for remote changes to power demand, without the need for action to be taken on-site will be reduced. Concerning the experimental tariff for domestic customers using electric heat pumps as their main source of heating their homes, the ARERA passed a resolution to extend the deadline for the customers to submit the applications to 31 December 2016, as a consequence requiring that also the monitoring of consumption and the relevant transmission of data by distributors must be done by 28 February 2017 (with reference to the information gathered as at 31 December 2016). There will be further consultation to consider the possibility of including other domestic customers in the experiment.
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As for the social bonus, by 31 December 2015, cost compensation to apply in 2016 will be calculated, to prevent the introduction of the tariff reform making the situation worse for customers suffering from economic hardship.
Resolution 659/2015/R/eel – Updating of prices and electricity marketing components (PCV, RCV and DISPbt) and changes to TIV.
After the consultation process promoted by Resolution No. 514/2015/R/eel, on 28 December 2015 the ARERA published the resolution updating the values of electricity marketing components in force from 1 January 2016, in other words the PCV, RCV and DISPbt components. In consideration of the proposals in the Consultation Pa per, the Authority:
(a) when defining PCV levels, aligned cost values related to acquiring customers and marketing with those identified within the scope of the definition of the QVD component and reduced the number of days of average exposure, resulting in a slight increase in the values of the PCV fee compared to what was expected in the consultation paper;
(b) in relation to the RCV component, it introduced further differentiation of the components in order to consider the effect of size, estimating a value (RCV) for separate companies supplying over 10 million withdrawal points for end users, and a value (RCVsm) for other separate companies. The unpaid ratio levels recognised for the protected categories market are lower than those in the consultation paper.
This reduction was requested by the Regulating Authority to further promote operator efficiency in terms of managing all phases of customer relations;
(a) required, not only for 2015 but also for 2014, the introduction of a transitional mechanism to cover operating costs other than arrearage, which considers the so-called size effect; protected categories market operators who supply over 10 million withdrawal points and meet certain requirements will have access to said mechanism; in order to have recourse to this mechanism, an application to participate in the Electricity Sector Equalisation Fund must have been submitted by 15 October 2016;
(b) for 2015, confirmed the mechanism to compensate for arrearage, already provided for transitionally by article 16ter of the Retail Service Code for 2014, for protected categories market operators who supply over 10 million withdrawal points and meet certain requirements. In order to apply for the mechanism, a specific application must have been submitted to the Fund by 30 April 2016. Furthermore, the Authority also published the compensation values for application of the mechanism with reference to 2016, lower than those estimated for 2015, to promote greater efficiency in credit management;
(c) revised the level of the DISPbt component in order to consider customers leaving the protected categories market and, for domestic customers, in coherence with the differentiation of fees for the distribution service for the consumption brackets referred to in resolution No. 654/2015/R/eel;
(d) required the annual revision of PCV and RCV values, coming into effect from 1 January of the year of reference. In particular, with reference to the protected categories market, any costs as a consequence of the introduction of debranding measures will be
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considered, to calculate the recognised cost, on the condition that said higher costs must be reported in the books;
(e) referred the regulation of a specific equalisation mechanism to guarantee the potential risk involved in failure to cover fixed costs when an end user leaves the protected categories market, to be applied from 2016, to a subsequent measure.
Resolution 927/2017/R/EEL - Update of the RCV and DISPbt components relating to the sale of electricity. Modifications to the TIV. Further provisions for populations affected by the earthquakes that occurred on 24 August 2016 and in the following days
With Resolution 927/2017/R/eel of 28 December 2017, the Authority published the updated RCV and DISPbt components for 2018, following criteria and methodologies already applied in the previous year.
As regards the RCV (Centre-South territorial area) there was a decrease in the recognised value for domestic points (from 4,345.30 to 4,076.76 €c/grid point) and an increase in the recognised value for points relating to other uses (from 12,536.55 to 14.623,02 €c/grid point) based on an unpaid Centre-South ratio which, compared to last year, is down for domestic customers from 1.0893% to 1.0762% and an increase for other uses from 3.1250% to 3.8664%.
With respect to the compensation of arrears mechanism (Centre-South territorial area) the value has fallen for domestic points (from 884.17 to 825.06 €c/grid point) and increased for points relating to other uses (from 5,873.78 to 8,082.69 €c/grid point); for the purposes of admission to this mechanism, the minimum unpaid ratio value for domestic points has fallen to 1.12% while for points relating to other uses it has risen to 5.13%.
Compared to 2017, the DISPBT has gone from -2,314.50 to -2,298.86 €c/grid point for domestic resident points and from -1,484.30 to -1,468.70 €c/grid point for non-domestic resident points, while going from -434.37 to -187.55 €c/grid point for points relating to other uses; the DISPBT component is also applied to energy amount for resident domestic customers only with values differentiated by consumption bands i.e. 0.269 €/kWh (from 0.272 in 2017) for the consumption band of less than 1,800 kWh/year and 0.619 €/kWh (from 0.583 in 2017) for the consumption band over 1,800 kWh/year. With respect to the incentive mechanism for increased dissemination of electronic bills, the Authority has on the other hand confirmed the last year’s values.
With Resolution 188/2018/R/EEL, in addition to updating the economic conditions of electricity sales as part of the enhanced protection service for the quarter 1 April - 30 June 2018, the Authority also updated the DISPBT component with effect from 1 April 2018 in order to take into account the structure of the tariff components for resident domestic customers to cover the general system charges in force from the same date.
With subsequent resolution 364/2018/R/EEL, with effect from 1 July 2018 the Authority confirmed the value of the PCV fee already in force in the period from 1 January 2017 to 30 June 2018 (Resolution 633/2016/R/EEL) waiting to update it after completing the PCV data collections that would be available starting from September 2018.
With Resolution 706/2018/R/EEL, the Authority published the PCV, RCV and DISPBT components updated for 2019. With regard to the RCVsm (specific for operators other than the incumbent) for the Central South territorial area, there was a particular decrease for all types
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of customers and in particular for other uses, where the component dropped to 1,629.87 €c/pdp from 14,623.02 in 2018. This RCV was calculated mainly on the basis of:
• an average unpaid ratio in Central-Southern Italy of July 2015 and June 2016 turnover, which is down compared to last year for both domestic customers (from 1.0762% to 0.85%) and for other uses (from 3.8664% to 2.83%) with a higher level of arrears for former customers;
• in relation to the remuneration of net invested capital taking into account an average exposure between the activity of purchase and sale of electricity equal to 38 days (against 41 days in 2017) and a WACC level of 6.5%.
Also with regard to the mechanism for compensating for arrears (Central-Southern area) the values show a significant decrease: domestic customers went from 825.06 c€/pdp in 2018 to 383.56 and other uses from 8,082.69 c€/pdp to 4,282.63 with new minimum unpaid ratio values (reference in order to be able to participate in the mechanism) also decreasing: domestic from 1.12% in 2018 to 1.06% and other uses from 5.13% to 3.56%.
The same resolution also updated the DISPBT component with the new monomial structure for domestic customers (the 626/2018), which no longer includes, for resident domestic customers, the energy share with differentiated values by consumption levels, but only the withdrawal point amount.
With regard to the PCV fee, applied to protected customers and defined in line with the marketing costs incurred by an efficient operator on the free market, there was a slight increase compared to 2018. In fact the 2019 fee for servants amounted to 6,538.46 c€/pdp (from the previous 5,778.84) and for other uses equal to 12,184.84 c€/pdp (from the previous 11,837.77). This PCV was calculated mainly on the basis of:
• an average unpaid ratio on July 2014 and June 2015 turnover and on July 2015 and June 2016 turnover which is 1.68% for domestic customers and 1.99% for other uses;
• in relation to the remuneration of net invested capital taking into account an average exposure between the activity of purchase and sale of electricity equal to 53 days and a WACC level of 6.7% due to the higher risk of sales activity on the free market.
In 2019, with resolution 576/2019/R/eel, ARERA updated the values of the RCV and DISPBT components. The PCV fee relating to the marketing of the electricity sales service entered into force starting from 1 January 2020.
Reform of the Retail Market: The "Similar Protection" ("Tutela Simile")
In resolution 369/2016/R/EEL of 7 July 2016, the Authority retained the orientations of the DCO 75/2016/R/eel "Reform of the protection of the retail price market for electricity and natural gas: tutelage similar to the free marker for electricity for domestic end users and small businesses", providing as of 1 January 2017:
• the reform of the protected categories market, the economic and contractual conditions of which are to be defined in a subsequent measure;
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• the implementation of the Similar Protection service, under more advantageous economic conditions than those in the reformed protected categories market (suppliers which intend to participate must offer a one-off bonus, expressed in Euro per supply point, discounting the economic conditions of enhanced protection). Customers and suppliers may opt for this service on a voluntary basis. A key role is attributed to consumer associations which, being qualified as "Facilitators", may assist customers in finalising the Similar Protection contract online, or may also do so on their behalf. Furthermore, they will receive a suitable payment for each Similar Protection contract that is finalised with their support.
Subsequent resolutions include 541/2016/R/eel, 633/2016/R/eel and 689/2016/R/eel:
• Resolution 541/2016/R/eel: the finalisation of a Similar Protection contract will be possible until 30 June 2018 independently of whether the protected categories market has been abolished according to the Competition DDL and that the value of the one-off bonus will not vary during the period of validity of the Similar Protection service. Albeit the Competition DDL has not yet been approved by the Government, Resolution 541/2016 still applies pursuant to law 481/95 article 2.2(h), which has granted the ARERA the power to introduce resolutions on energy matters also from a contractual point of view. ARERA’s aim is to obtain a completely free market without any price protection, even before the primary law intervention. The latest draft law of the Competition DDL sets the end date of the regulated market as at 30 June 2019;
• Resolution 633/2016/R/eel: the Authority has regulated the reformed protected categories market (MTR), defining the economic conditions, or PED (quarterly estimate), PPE and PCV, and the contractual conditions, stating that as of 1 January 2017 the security deposit will not be payable in instalments;
• Resolution 689/2016/R/eel: the Authority completed the regulation concerning the facilitators, quantifying the lump-sum payment due to them for each contract finalised with their assistance.
In the 2017, with the aim of strengthening the ability to choose small customers and overcoming information asymmetry, ARERA approve the following decision:
Resolution 555/2017/R/com - PLACET (Italian acronym of "Prezzo Libero A Condizioni Equiparate di Tutela", meaning an offer at free prices at conditions equivalent to those of the standard offer) offers and minimum contractual conditions for supplies to domestic and small business end customers in free electricity and natural gas markets
With Resolution 555/2017/R/com of 27 July, the Authority, following DCO 204/2017/R/com, has approved the rules on PLACET (Italian acronym of "Prezzo Libero A Condizioni Equiparate di Tutela", meaning an offer at free prices at conditions equivalent to those of the standard offer) offers together with minimum contractual conditions for all other free market offers other than PLACET offers; these provisions will come into force on 1 January 2018. In particular, the Resolution provides that PLACET offers must be inserted by each free market operator in their commercial offers both for the electricity sector (for domestic and non- domestic grid points connected to low voltage), and for the gas sector (for domestic and non- domestic points of delivery, including apartment buildings for domestic use for points with an annual consumption of less than 200,000 scm). As regards the general supply conditions, the seller may alternatively choose to use either the form prepared by the Authority or draw up
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their own general contractual conditions in accordance with the resolution, the form and regulations which do not contain any additional contractual conditions. As regards the economic conditions for the part to cover the costs typical of the procurement and marketing of the commodity, PLACET offers require a fixed amount €/point/year and an energy amount €/kWh or €/scm. It is envisaged that the energy amount will have two separate price formulas, a fixed price and a variable price (based on the National Single Price (PUN) for the electricity sector and on the TTF for the gas sector).
With Resolution 848/2017/R/COM, the Authority extended the entry into force of the PLACET offer until the date of approval by the Authority of the general supply conditions form.
With Resolution 89/2018/R/com, the Authority therefore resolved that starting from 1 March 2018 all sellers were required to make PLACET offers available on the retail market. The provision also approved the modules of the general conditions of supply of the PLACET offers. In accordance with the dates specified by the Authority, AE has made the offer available through the shop and via the website.
With Resolution 288/2018/R/com, the Authority established the obligation for sellers to transmit instrumental data for the monitoring of PLACET offers, establishing that starting from 1 March 2018 they submit by the month following the end of each quarter the number of contracts with PLACET offer activated and terminated.
The “Annual Market and Competition Law”, no. 124 of 2017, which entered into force on 29 August 2017, provided for the termination of price protection schemes in both the electricity and gas sectors starting from 1 July 2019. The implementing decree of the MISE, expected by April 2018 and not yet issued, should define the measures to ensure the termination of the transitory price regulation and the conscious entry into the market of final customers, according to mechanisms that should ensure competition and the plurality of suppliers and offers in a free market.
On 21 September 2018, Italian Law 108, which converted Italian Decree Law no. 91 of 25 July 2018, postponed the termination of the price protection schemes until 1 July 2020. On 31 December 2019, Italian Decree Law no. 162/2019 was approved (so-called “Milleproroghe”) establishing a further postponement of the termination of the price protection schemes to 1 January 2022. In the meantime, with Resolution 59/2019/R/com – Voluntary guidelines for the promotion of electricity and natural gas offers benefiting purchasing groups aimed at domestic end customers and small businesses – the Authority prepared Guidelines (LGA) with voluntary participation for the promotion of commercial offers of electricity and gas benefiting purchasing groups and the creation of IT platforms that can facilitate the aggregation of small consumers. These guidelines, effective from 1 May 2019, establish rules of conduct that purchasing groups are required to observe for a period of at least two years after voluntarily adhering to them. New Standard service for end of the default service With a consultation (DCO 397/2019 – Standard service for final domestic customers and small businesses in the electricity sector referred to in article 1, paragraph 60 of Italian Law no. 124/17) ARERA proposed its guidelines on the new Standard Service for small customers (i.e. final customers currently using the default service) who will find themselves without a supplier the day after the termination of the default service, hoping for a gradual transition with the application of this service initially only to non-domestic customers, after the necessary legislative action (approach reiterated also with the subsequent Brief 468/2019/I/com – Brief of ARERA on the recent update of the final prices of electricity and natural gas and on the initiatives launched by it to benefit consumers with regard to the standard service – of 18 November 2019). The
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Authority has proposed a three-year service starting from the assignment through tenders of lots (subject of a subsequent DCO) of about 500,000 to 1 million customers, similar in terms of characteristics and level of arrears, which will be reserved for operators with solid economic, financial, managerial and operational requirements. The service is assigned to the best price at a discount (or increase) of the PCV. The difference between the PCV and the price offered in the tender, called “alpha” fee, will be charged to the customer after 12 months for domestic and 6 for non-domestic customers or immediately if the “alpha” fee is negative and also applied to free market offers, to avoid distortions between the standard and free markets. The Regulator therefore proposes two possible alternative models of the service: model 1: with a Single Buyer responsible for procurement and the main utility provider in charge of sales (with the further hypothesis 1bis in which the Single Buyer is also responsible for the management of the amounts paid by end customers and their distribution among the various parties in the chain); model 2: with the main utility provider in charge of both procurement and sales. With regard to the contractual conditions, the Authority proposes that they should be equivalent to the standard PLACET offer, including the prohibition of the inclusion of an additional product or service with respect to the supply of electricity, but with the possibility of always being able to offer one’s own product on the free market.
During the 2017, the entire system has been involved in the structure of the general costs of the system for the electricity sector and ARERA worked on it very deeply, below a list of the main resolutions:
a) Resolution 109/2017/C/EEL - Start of process for compliance with the sentences of the Regional Administrative Court of Lombardy, Section II, 31 January 2017, 237, 238, 243 and 244, relating to the resolutions of the Authority 268/2015/R/eel, on the subject of guarantees for the collection of the general costs of the electricity system
Resolution 109/2017/R/EEL of 3 March 2017 following the sentences of the Regional Administrative Court of 31 January 2017, Nos. 237, 238, 243 and 244, which cancelled the Network Code (Resolution 268/2015/R/EEL) in the part which also considered general charges not collected in the calculation of the amount of the guarantee due by the seller to the distributor.
The Authority appealed against these sentences to the Council of State with Resolution 79/2017/C/EEL of 23 February 2017, defining the transitional rules with Resolution 109 according to which distributors have the obligation to:
• reduce the number of guarantees by 5.6% (this reduction was motivated by the shortening of the contractual resolution times in case of the seller’s non-fulfilment, as provided for by Resolution 553/16);
• apply a further reduction of 4.9% to the proportion of the guarantee amounts (already reduced) only relating to general costs (this reduction was determined based on the estimate of the charges normally levied);
• adjust the guarantees by 14 April 2017.
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At the same time, the Resolution initiates a process to identify, by 31 December 2017, the final rules for the guarantees of the Network Code and adopt compensation mechanisms for sellers and the distributors for any non-collection of the general costs of the system, applicable from January 2016.
Resolution 109 was contested by Gala S.p.A. with the request for a precautionary measure rejected by the Regional Administrative Court on 24 March 2017, while on 25 May, the Council of State accepted its appeal on the order of the TAR, temporarily suspending the reductions in the amounts of guarantee in favour of the distributor.
The Council of State, on 30 November 2017, dismissed the appeals presented by E- Distribuzione and by the Authority against the sentences of the Regional Administrative Court of January 2017, confirming therefore, the cancellation of the provisions of the Network Code which provide for the inclusion of the general costs of the system not collected in the calculation of the guarantees that sellers must pay to distributors to conclude the transmission contract. As a result of this, in the statement on 29 December 2017, the Authority stressed that the transitional rules defined by Resolution 109 fully apply in all parts. In order to settle the whole matter, with the consultation document 52/2018/R/EEL the Authority gathered operator comments to establish a mechanism that from 2019 would allow sellers to recover general system charges (incurred in 2016) from those paid to the distribution companies but not collected by the final customer and any transfer costs and legal costs related to these charges. The document also envisaged that in cases of particular difficulty of the seller it can submit an early application for recovery, in 2018. Given the outcome of the consultation, which highlighted the impossibility of reconciling the various interests involved, and given the absence of primary legislation defining the issue, with Resolution 430/2018/R/EEL the Authority suspended the definition of the specific recovery mechanism, considering it more appropriate to implement a reform of the entire sector regulation by 30 June 2019. At present, the issue is very controversial and the Authority, pending a stable determination of the process of collection of general charges, has set up a technical roundtable involving various stakeholders to define a transitional mechanism that allows the repayment of the sums advanced by seller.
b) Resolution 50/2018/R/EEL of 1 February 2018 – Provisions relating to the recognition of charges that could not otherwise be recovered due to the failure to collect general system charges
The Authority introduced a mechanism to reinstate the general system charges paid but not collected by distributors and establishes:
• the conditions for access: it is envisaged that access to the mechanism will be given to any distributor that requests it and that fulfils the obligations of paying the general system charges starting from the receivables accrued from 1 January 2016, in relation to transport contracts terminated for non-compliance for at least 6 months;
• the recoverable amount: the amounts to be included both related to the charges incurred for any actions aimed at the collection of receivables and the receivables not collected identified by the ARERA, as well as the amounts to be excluded or considered reduced. The procedural aspects and obligations set by the Energy and Environmental Services Fund (CSEA) are then defined for quantification and settlement of the amounts to be recognised to the companies. Lastly, resolution 626/2018/R/EEL of 5 December 2018, in which the Authority deferred the completion of the reform of the general system
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charges for domestic users to 2020, postponing the elimination of residual progressiveness from rates. Therefore, the two-scale structure remains in place for 2019 (up to 1,800 kWh/year and over 1,800 kWh/year).
With Resolution 300/2019/R/eel – Urgent amendments to the Authority’s Resolution 50/2018/R/eel concerning uncollected general charges – ARERA excluded from the quantification of the uncollected receivables (to be repaid by means of the current mechanism of Resolution 50/2018) any interest on arrears billed to transport users and recalculates it at the legal interest rate. Subsequent Resolution 495/2019/R/eel – Provisions on the recognition of non-recoverable receivables relating to general system charges not collected by electricity distribution companies. Confirmation with additions to the Authority’s resolution 300/2019/R/eel – clarifies that the provision of Resolution 300/2019 refers to receivables arising after 11 July 2019 (date of entry into force of Resolution 300/2019/R/eel) and provides that the amounts relating to applications already submitted shall be settled by 31 March 2020.
c) Resolution 481/2017/R/EEL - Tariff structure of the general costs of the system for the electricity sector applicable from 1 January 2018. Definition of the groupings of the system’s general costs
The Authority has defined the new tariff structure of the general costs to be applied from 1 January 2018 to non-domestic customers relating to components A2, A3, A4, A5, As, MCT, UC4, UC7, providing in particular for:
• two groupings: i) general charges related to supporting renewable energy and cogeneration (ASOS) and ii) remaining charges (ARIM);
• these groupings to have a trinomial form, characterised by three rates (a fixed amount expressed in euro cents per grid point per year; a power amount expressed in euro cents/kW per year; and a variable amount expressed in euro cents/kWh);
• the structure of the ASOS grouping to be differentiated by classes of incentives provided for companies with a high electricity consumption (energy-hungry) defined with Resolution 921/2017/R/EEL of 28 December 2017;
• that for the sake of simplicity, the afore-mentioned tariff structure is also applied to domestic customers and also concerns the tariff components UC3 and UC6, which are not related to general costs.
With Resolution 921/2017/R/EEL and subsequent Resolution 71/2018/R/EEL, the Authority then concluded the process of reforming the general charges, defining the new methods for implementing incentives for energy-intensive businesses.
With Resolutions 285/2018/R/EEL and 339/2018/R/EEL, the Authority approved the implementation rules (methods and timing) for the opening of the portal by Cassa for registration in the list of companies with a high electricity consumption for the year 2018.
With Resolution 181/2018/R/EEL, the Authority established the implementing provisions to allow the Cassa to proceed with the granting of subsidies to energy-intensive businesses pertaining to the years 2016 and 2017 and to other related prerequisites.
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d) Resolution 867/2017/R/EEL - Postponement of the completion of the reform of the tariff components to cover the general costs of the system for domestic electricity customers, referring to Authority Resolution 582/2015/R/EEL
The resolution differentiates from 1 January 2019 the implementation of the reform of the tariff components to cover the general ASOS and ARIM costs of the DispBT component (marketing of the sale) for domestic electricity customers, providing to maintain the tariff structures currently in force throughout 2018 with differentiated rates for consumption bands (above and below 1800 kWh/year) and distinguishes between residents and non-residents.
The extension is necessary to avoid the combined effects of the revision of the incentives for energy-hungry companies and of the last phase of the tariff reform for domestic customers on the electricity bills of the same domestic customers.
e) Resolution 922/2017/R/EEL - Completion of the reform of the tariff structure of general system charges for non-domestic users in the electricity sector and coordination with the new system for recognizing subsidies for companies with high electricity consumption. Changes and additions to the TIT, also with reference to domestic users
The resolution completes the reform of the tariff structure of general system charges for non- domestic customers in the electricity sector, implementing the provisions of Resolution 481/2017/R/EEL, coordinating it with the new mechanism for recognizing benefits for strong businesses electricity consumption.
Second generation (2G) smart metering systems in the electricity sector
Resolution 87/2016/R/eel – "Functional specifications authorising intelligent low voltage meters and performance of the relevant second generation (2G) smart metering systems in the electricity sector, according to Legislative Decree no. 102 of 4 July 2012"
This measure defines the functional specifications and expected performance levels of the 2G smart metering systems, in view of the replacement of the meters currently installed on low voltage utilities, which have completed their regulatory lifetime. More specifically, the ARERA provides that the 2G meters must be equipped with two communication channels: the first – chain 1 – for the transmission of data to the distributor’s infrastructure, which can then use the Power Line Carrier (PLC) in band A, RF 169 communication technology or other TLC technologies, and the second – chain 2 – for the transmission of data to the customer, which must use at least the PLC in band C. The possibility of the future adoption of an additional technological communication solution (optical fibre or wireless) for both channels is also provided. The functionalities that the 2G systems must include: continuous meter readings, energy registers and power and recording of voltage quality indices and management of certain contractual information.
Resolution 646/2016/R/eel – Second generation (2G) smart metering systems: recognition of the cost of low voltage electricity meter reading and provisions concerning their implementation. Modifications to the TIME
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The measure establishes, for distribution companies serving more than 100,000 withdrawal points, the criteria for the recognition of the capital cost of the 2G smart metering systems which respect the functional requirements and performance levels defined in resolution 87/2016/R/eel. For the initial phase of the new regulatory framework, the ARERA has defined two regimes for the recognition of the cost of meter reading:
• specific regime, for companies starting the plan for implementing a 2G smart metering system by the end of 2017 (this plan does not involve ARETI and must be approved by the Authority);
• transitory regime for companies which, conversely, have not yet started the plan for the implementation of a 2G smart metering system.
The transitory regime, which involves ARETI, will be fully effective as of 2018 and will be based on parameter related logic. The current provisions based on the criterion of historical cost adjusted by the application of a maximum unitary expenditure threshold admissible in the tariff (equal to 105% of the gross value invested in each meter for investment made operational in 2015) have been retained for 2017.
In 2017, ARERA consulted the first guidelines on the new Totex tariff method, specifying the duration of the entire tariff development process equal to 30 months and therefore indicating the start of the new method beyond 2020 as initially indicated in the resolution 654/2015
Resolution 683/2017/R/eel - Application of the totex approach in the electricity sector. The first guidelines for the introduction of incentive-based adjustment schemes on overall control of expenditure
The paper shows the first of the Authority’s guidelines on the new incentive-based adjustment approach on overall control of expenditure, the so-called Totex approach. This approach has the following main features:
• Focusing on total expenditure improving on the current scheme which considers operating costs and investments separately;
• forward-looking with the simultaneous strengthening of the regulator’s capacity to critically assess the expenditure forecasts made by companies, as summarised in their business plan. In particular, the regulator must find its own assumptions about the development of the development path not only of operating costs, but of total expenditure (so-called baseline) therefore also comprising capital expenditure estimates;
• application of the adjustment menu (IQI matrix) that combines incentives with efficiency incentives to formulate accurate forecasts to tackle the problem of information asymmetry between the regulator and the entities regulated.
The consultation identifies four main themed areas for the development of the Totex approach:
1) business plan: the companies submit their business plan to the regulator (with a time horizon of 5-10 years), in which they explain their assessments on the question of service (in terms of expected quantity and quality levels) and on the basis of which they make their investment decisions, specifying the objectives pursued and proving that they adopt the most effective solutions to achieve them. These activities will be
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complemented by the public debate process in which the companies acquire the point of view of stakeholders;
2) cost assessment: refers to the estimation of the baseline by the regulator and the acquisition activities and data necessary to manage the totex approach, both in the predictive stage, and in that of actual consumption and control;
3) Incentives: the intention is to continue with the incentives system of the current regulations, in addition to implementing the incentives of the IQI matrix;
4) managing uncertainty: the intention is to start an interactive process with companies to provide the regulator with a certain quality of information needed.
With reference to the scope of application, the paper seeks to assess the possibility of providing for the fifth regulatory period, the application of the approach to the national transmission operator and, in relation to the distribution service, ensuring extensive coverage of the territory while initially limiting the number of stakeholders.
With Resolution 700/2017/R/EEL which follows Resolution DCO 466/2017/R/EEL, the Authority ordered the TIS modifications aimed at applying hourly processing for use points equipped with 2G smart metering systems. In particular, the Resolution provided for the IWS to carry out the first aggregation for the purpose of settling the daily quarter-hour curves relating to withdrawal points gradually equipped with 2G smart meters with regard to the measurement data for August 2018 (anticipating the transition to hourly processing starting from the thirteenth month after commissioning, guaranteeing dispatching users at least 12 months of measurement data for correct scheduling of use). The date of entry into force of the new standard formats relating to measurement data from 2G systems was postponed to 1 January 2019 from the previous 1 October 2018.
With Resolution 88/2018/R/EEL, the Authority published the methods and time frames for exploiting and displaying the configurable information for the 2G withdrawal points in operation via IWS, applicable starting from 1 October 2018.
With Resolution 669/2018/R/GAS, the Authority confirmed the need to continue the commissioning process of the G4-G6 class smart meters (typical for home use), updating resolution 631/2013. In particular, distribution companies with more than 100,000 customers are expected to commission at least 85% of the new grid points by 2021.
With the publication of the consultation document 245/2018/R/EEL of 11 April 2018 which illustrates the Authority’s guidelines on the definition of the functional specifications for the "2.1" version of second-generation meters. Specifically, the guidelines concern: the possible definition of a complementary channel on chain 2 for sending information to the end user, the possibility of remote reinitialization in the event of excess power, the possibility of displaying removal readings, the possibility of evaluating the achievement of certain threshold values set by the seller, the methods for implementing pre-paid offers.
Furthermore, with Resolution 419/2018/R/EEL of 2 August 2018 the Authority defined criteria for the recognition of measurement costs for low voltage electricity linked to the installation of 2G meters before starting the plan of mass installation envisaged by provision 646/2016/R/eel. In particular, the ARERA:
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• confirmed the rules for recognising capital expenditures also in force for the 1G investments that will come into operation in 2019, providing that the maximum value recognisable per meter will always be equal to 105% of the corresponding value for 2015;
• introduced a new transitional mechanism for investments in 2G installed by the companies in the years 2018 and 2019, before the start of the mass replacement plan, such that the maximum recognisable expense per 2G meter will be equal to the sum:
• of 125% of the average unit expenditure incurred in 2015 for the procurement of 1G meters,
• of 105% of the investment per meter net of the average expenditure for the supply of installed meters incurred in 2015.
The changes respond to the difficulties of some DSOs finding 1G meters that are no longer in production and to the simultaneous need to start supplying 2Gs before submitting the request for admission to the recognition of specific investments (RAR1) to the Authority.
Resolution 100/2019 / R / eel - Second generation smart metering systems for the measurement of low voltage electricity. Update for the 2020-2022 three-year period on the provisions for the recognition of costs of 2G smart metering systems
On March 20, 2019, the Authority introduces an update for the 2020-2022 three-year period of the provisions on the determination and recognition of costs relating to second-generation smart metering systems (2G). In particular, the proposals reported in the consultation document include:
• the possibility of setting obligations on the timing of the commissioning of 2G systems together with the modulation of the "conventional plan" in order to reduce the "two-speed country" risk; the updating and simplification of the provisions relating to the admission to the fast track of the companies that start their own commissioning plan for 2G smart metering systems in these three years;
• the evaluation of the provisions of the decree of the Minister of Economic Development 93/2017 concerning the periodic verification of electricity meters and the extra costs that could arise;
• the possibility of introducing provisions to quantify the penalties to be applied in the event of failure to comply with the expected performance levels of 2G smart metering systems.
With Resolution no. 306/2019/R/eel – Update for the threeyear period 2020-2022 of the directives for the recognition of the costs of second-generation (2G) smart metering systems for the measurement of low-voltage electricity and commissioning provisions – ARERA updated for the three-year period 2020-22 the directives for the preparation of plans for the commissioning of second-generation (2G) smart metering systems and defined the cost
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recognition mechanisms and penalties for failure to implement the plan or for failure to meet expected performance levels. Although with slight changes, the guidelines presented in DCO 100/2019/R/eel were confirmed, specifically: • the major DSOs must start the installation phase by 2022 and finish by 2026 (at least 95%), with an intermediate step to be achieved by 2025 (90% of the planned installations); • it confirms the general principle of not recognising costs associated with voluntary early disposal of 1G meters (so-called stranded meters), and to avoid “two-speed country risk” distribution companies that have yet to submit to the Authority their “2G smart metering system commissioning plan”. (PMS2) will have PCO2 calculated in such a way as to encourage the shortening of the current gap; • starting from year 4, penalties are envisaged for failure to meet expected performance levels (only monitoring is carried out in the first three years of PMS2), with annual and multi-annual ceilings on penalties.
In September 2019 ARETI sent the Authority a request for admission to the recognition of this type of investment and held a public session to present the plan in October 2019. The plan envisages the replacement of 2.3 million meters by 2034 with a total expenditure of € 546 million, of which € 318.9 million in capital expenditures. The consultation phase of ARETI’s 2G smart meter plan envisaged in resolution 306 ended in November. The Authority is expected to publish the resolution approving the costs of ARETI’s 2G smart meter systems in 2020.
Debranding – Obligation of brand separation for the sale of electricity to end users
Resolution 327/2016/R/eel – Extension of the deadline for the fulfilment of the obligation of separating the communication policies and brand for the sale of electricity to end users
With this measure, the Authority deferred until 1 January 2017 the deadline by which the "debranding" needs to be carried out, in other words the separation of the brand and the communication policies of the electricity companies operating on the free market and the protected categories market. The previous deadline of 30 June 2016, defined in resolution 296/2015/R/com, remains unchanged for the debranding of the distribution companies from the vendors belonging to the same corporate group. The deferral was granted in order to await the publication of the competition DDL, in which methods of overcoming the protected categories market may be provided (such as the awarding of the service through joint procedures), which would make the debranding measures as drawn up by the Authority, the respect of the need to protect end users and the goal of encouraging competition no longer justifiable. As of 1 January 2017, Acea Energia has fulfilled the requirements of resolution 296/2015/R/com as regards "debranding", adopting a new brand name for the customers of the Protected categories market: "Servizio Elettrico Roma".
Provisions for the Regulation Integrated Text
TIQE: Resolution 413/2016/R/com – Modifications to the regulation of the commercial quality of the electricity and natural gas distribution service
The resolution is part of a wider-ranging measure implemented by the ARERA with the aim of rationalising the system of customer protection on the matter of processing claims and the extra-judicial settlement of disputes, introducing some modifications to the TIQE concerning the following aspects:
• provisions concerning the times for making available the technical data requested by vendors; a procedure for reducing the timeframes for dealing
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with the requests in question was provided as of 1 January 2017 and will be completed in 2019;
• the base value of the automatic indemnity due to the vendor in the event of failing to meet the specific standards for making available the technical data is increased from Euro 20 to Euro 30; and
• the maximum timeframe for the payment of the abovementioned indemnity is reduced to 6 months from the request date.
As regards the method of requesting the technical data from the distributors, resolution 795/2016/R/eel has been published, regulating, within the framework of the distributor making available the technical data requested by the vendor, the circumstances falling in the category of "other complex technical data" as provided in article 9, paragraph 91.4 of the TIQE and article 51, paragraph 51.4 of the RQDG.
With resolution 566/2019/R/eel – Approval of the Integrated text of the output-based regulation of electricity distribution and metering for the 2020-2023 interim period, issued following consultation no. 287/2019/R/eel, ARERA updated the TIQE for the 2020-2023 interim period. Specifically, it envisages: • the confirmation of the year 2023 for the achievement of continuity target levels, granting them only to the areas with the worst levels of continuity; • the introduction of a special incentive scheme for critical territorial areas; • the establishment of a mechanism of regulatory experiments to help improve the quality of service; • the introduction of the recording of the number of meters replaced due to faulty display; • from 2021 comparative publication also for voltage dips; • limiting the premium on the individual project to improve the resilience of the networks to a maximum value equal to the cost of the project itself.
TIME: Resolution 458/2016/R/eel – Regulation of electricity meter reading. Approval of the Integrated Text of provisions for the regulation of electricity meter reading (TIME)
The ARERA has rationalised in a single measure, which became effective from 1 January 2017, the regulation of the activities comprising the measurement of outgoing, incoming and produced electricity, reviewing the definitions and responsibilities for the various operations. The structure of the responsibilities involved in managing the service has been partly modified, and the management of the interconnection data between the national grid and the distribution networks has been awarded to Terna. The latter will send the electricity measurements from the national grid to the distributors, no later than the third working day of the month following that to which they refer. The text contains a specific section on automatic indemnities, and also introduces a new indemnity charged to the distributor to be paid, with regards to each hourly withdrawal point, in the event of delayed availability or failure to make available to transport users the energy meter readings within the timeframes provided in the regulation.
TICO - Resolution 209/2016/E/com – Adoption of the integrated text concerning the procedures for extra-judicial settlement of disputes between customers or end users and operators or managers in the sectors regulated by the Authority for the electricity and gas sector and water network – Settlement Integrated Text (TICO)
With this resolution, the TICO (Settlement Integrated Text) was approved, which established the obligatory nature of attempting settlement as a condition for proceeding with lawsuits, in force as of 1 January 2017. Specifically, the document defined the procedures and operating
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methods for the obligatory settlement attempt through the settlement board, which was set-up by the Authority for the online completion of procedures for the voluntary extra-judicial settlement of disputes of a conciliatory nature. These procedures, regulated by resolution 260/2012/E/com, were no longer active as of January 2017, except for their transitory application to pending settlement procedures. Similarly, as of January 2017, the effects of the list of operators which voluntarily adhered to the settlement procedures ceased. Consequently, the choice between the settlement board and second level appeals before the consumer authority has now been repealed. As an alternative to settlement through the Authority, it will be possible to make the obligatory attempt at settlement through the Chamber of Commerce mediation/settlement procedures and the procedures of the entities in the ADR list (set-up by the Authority in resolution 620/2015/E/com), which will include equable settlement entities. In resolution 383/2016/E/com, the Authority simultaneously adopted the Regulation by which it changes the availment of the Sole Purchaser (AU) for the efficient management of appeals, and the settlement procedures, so that as of 1 January 2017, the AU may, among other things, ensure the operating status of the settlement service and deal with specific disputes concerning pre-defined cases in derogation of the principle of exclusive recourse to the settlement board (so-called special settlement procedures). The new regulations of the settlement board, which came into force with the TICO, involve end users powered by medium and low voltage, domestic and other, and also include prosumers as regards disputes with the operators and the GSE (for specific withdrawal and on the spot exchange).
TIRV - Resolution 228/2017/R/com - Adoption of the Code regarding preparatory measures for the confirmation of the electricity and/or natural gas supply contract and voluntary reinstatement procedure TIRV
Despite the TIRV having entered into force on 1 May 2017, the Authority has nevertheless submitted the most innovative parts of the text for consultation, i.e. the new deadlines for submitting complaints to contest the conclusion of the contract by domestic customers as well as the procedures and the deadline for signing up to the reinstatement procedure always for the latter and, finally, also the provisions relating to non-domestic customers.
The TIRV, which repealed Resolution 153/2012, applies to contracts negotiated away from business premises or remotely and provides:
• that in the case of a domestic customer complaint about the irregularities in the confirmation of the contract: • the reinstatement rules that can only be activate as a result of the customer signing up in writing within a mandatory period (20 days from the date of delivery of the reply to the complaint to the postal carrier/sending of the email); • a new deadline for the submitting complaints (40 days from the issuance of the first bill); • further information obligations in the reply to the complaint by sellers • if the domestic customer does not sign up to the reinstatement procedure, they can activate the conciliatory procedure with the Authority’s Conciliation service or with other organisations; • for removal as requested by the European Commission of any reference "to contracts or activations not requested" to eliminate any ambiguity about the application of the resolutions in words to any provisions not requested referred to in the Consumer Code (Art. 66 D);
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• differentiated rules applicable to non-domestic customers (regarding preventive measures and the lodging of a complaint).
Salespeople already signed up to the procedure of 153/12 are automatically entered in the new list of vendors participating in the TIRV. With Resolution 543/2017/R/com of 20 July, the Authority has made changes to the TIRV that require the seller, when receiving a complaint from a domestic customer, to also informs them about the measures that will be adopted in the case where the same customer has not expressed their participation in the reinstatement procedure (which may also match the procedures governed by the TIRV).
TISIND - Resolution 593/2017/R/com - Changes to the indemnification system: implementation in the SII and rules of its application to the natural gas sector
With Resolution 593/2017/R/com on 3 August, the Authority approved the TISIND (indemnification system for the defaulting end customer system in the electricity and natural gas sectors integrated text), i.e. the return to the rules of the indemnification system already in force since 2010 in the electricity sector: it envisages implementation of the rules in the Integrated Information System (SII) and also its extension to the field of natural gas. In the new text, the indemnification quantification criteria are confirmed for the electricity sector and also extended to gas, only envisaging an update of the indemnification calculation which will be equal to the lowest of either the receivable relating to consumption in the last 4 months or the average value of 3 months of provision of the supply, recognising the extension of the potential shortfall period of sellers following some regulatory changes on formal notice and switching. Moreover, the TISIND simplifies the operational methods and streamlines the set of texts that make up the current transitional rules. The SII Operator, by 31/05/2018, will be responsible for implementing the technical specifications (in consultation until 16/10/2017) and the related functional testing. Based on the outcome of these activities, the Authority will identify the date of entry into force of the TISIND with a subsequent measure, possibly also separate for each sector, electric and gas.
Resolution 668/2018/R/eel – Economic incentive for interventions to increase the resilience of electricity distribution networks
With Resolution 668/2018/R/EEL of 18 December 2018 the Authority introduced an incentive mechanism for investments aimed at increasing resilience, focusing in particular on the resistance of distribution networks subjected to extreme weather events. As anticipated by the Authority in consultation, projects with benefits greater than costs are eligible for a bonus, while all the projects present in the Resilience Plan of the DSO are subject to penalties. More in detail, the bonus for each project – quantifiable as 20% of the net benefit of the project itself – will be reduced by 50% in the event that the effective completion date is postponed by six months compared to what was initially envisaged in the Plan. At the same time, the penalty associated with each project will be 10% of the costs actually incurred for the task if the effective completion date is postponed by 12 months compared to what was initially specified in the Plan, and 25% if the delay lasts 18 or more months. In the latter case, the DSO must justify the causes of the delay, describe the actions taken to recuperate the time lost and give an indication of any extra costs arising from the delay. With regard to the operating procedures of the bonus/penalty mechanism, the resolution envisages that by 30 November every year from 2019 to 2024 the Authority will update and publish the list of the projects of each main DSO eligible for a bonus and/or penalty, and by 31 December of each year from 2020 to 2025 it will determine for each DSO the bonuses and penalties related to the projects with effective completion date in the previous year.
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ARETI sent to ARERA its 2019-2021 resilience plan in order to participate in the incentive mechanism of rewards and penalties as early as 2019. With resolution 534/19 ARERA resolved to include the projects in ARETI’s 2019-2021 Resilience Plans in the mechanism of premiums and/or penalties. About 230 projects are planned for a total of € 69 million in investments, mainly concentrated in 2020, designed to mitigate the risk of heat waves (most of the projects) and flooding (the balance).
Electricity sector: ARERA activity during the 2019
2020 Budget Law The 2020 Budget Law, no. 160 of 27 December 2019, abrogated paragraph 5 of art. 1 of the 2018 Budget Law envisaged the non-applicability of the two-year limitation period for consumption in the event of failure or erroneous collection of consumption data resulting from ascertained liability of the user. The law also introduced additional rules for the benefit of the end customer. Indeed, utilities operators have an obligation: • to communicate the suspension of supplies in the event of failure to pay, with adequate notice of no less than forty days by registered letter with return receipt; • to pay a penalty equal to 10% of the amount that is disputed and not due, in any case, for an amount of no less than € 100, in case of issuing debit bills for which the illegality of the conduct of the manager and the operator concerned is ascertained, for violations relating to the methods of detection of consumption, execution of adjustments or billing as well as for charges of unjustified expenses and costs for consumption, services or goods not due, and of course to reimburse any amounts already paid by the customer
With Resolution 58/2019/E/eel ARERA initiated a fact-finding investigation aimed at better understanding the methods used to manage the regulation of the financial items relating to electricity destined for countries within the Italian territory. At the conclusion of the first analyses, Resolution 491/2019/E/eel closed the preliminary investigation and launched consultation 492/2019/R/eel, with which it defined the Authority’s guidelines according to which electricity must be subject to the normal charging rules for the services concerned while it does not consider it appropriate to apply the general system charges.
With resolution 467/2019/R/eel, the Authority initiated an experimental regulation on the modernisation of buildings’ old riser cables with effect from 1 January 2020 and for a duration of three years, aimed at: • performing a national census of old riser cables; • involving and encouraging the apartment complexes to modernise their riser cables; • ensuring greater access to the electricity supply; • gaining useful experience in order to define a subsequent stable regulatory framework. Integration between electric vehicles and the electricity grid
With consultation 345/2019/R/eel, the Authority expressed its guidelines for the revision of the conditions for the provision of transmission, distribution and dispatching for electricity withdrawn and subsequently fed back into the grid by the storage systems, as well as electricity withdrawn from auxiliary generation services. Automatic compensation to end customers for long-term interruptions
With Resolution no. 553/2019/R/eel – Closing of the consultation procedure initiated by Resolution no. 404/2019/R/eel for the execution of the Lombardy regional administrative court ruling no. 1901/2019 voiding the Authority’s Resolution no. 127/2017/R/eel concerning the extension of automatic compensation to end customers, charged to network operators, for long- term interruptions – ARERA closed the consultation procedure initiated by Resolution no.
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404/2019/R/eel for the execution of the Lombardy regional administrative court ruling no. 1901/2019 voiding the Authority’s resolution 127/2017/R/eel concerning the extension of automatic compensation to end customers, at the expense of network operators, for long-term interruptions. The measure also takes into account the outcome of consultation 430/2019/R/eel and a request for information from distribution companies regarding automatic compensation to end customers for extended or prolonged interruptions for the period 1 October 2017-20 August 2019.
With Resolution no. 559/2019/R/eel – Losses from electricity distribution grids: confirmation for the year 2020 of the conventional percentage loss factors and extension of the procedure initiated with Authority Resolution no. 677/2018/R/eel – the Authority confirmed for the year 2020 the values of the conventional percentage loss factors to be applied to withdrawals, injections and interconnections between grids.
Through two separate consultations, no. 412/2019/R/eel – Modification of the process of termination of dispatching and transport contracts and activation of services of last resort in the electricity sector – and no. 530/2019/R/eel – Updating of the standard network code for the electricity transport service – the Authority described its guidelines in order to strengthen the entire system. The proposed actions relate to the reduction of debt collection times and contractual termination, thereby reducing the cost of the guarantee system for compliant transport users. In fact, ARERA hypothesised a reduction in the amounts of the guarantees to be given by sellers, which are currently commensurate with 3-5 months of turnover, down to 2-4 months of turnover. Moreover, it proposed measures to reinforce guarantees, with particular attention to the rating and the insurance surety, as well as the clause verifying the regularity of payments and the procedures for verifying the adequacy of the amounts of guarantees given.
With Resolution no. 83/2019/R/eel – Verification of the conformity of proposals to amend the grid transmission, dispatching, development and security code in relation to the system of guarantees to be provided by users of withdrawal dispatching – the Authority positively assessed some proposals to amend Terna’s Grid Code with respect to the system of guarantees to be provided by users of withdrawal dispatching. Specifically: • the minimum value of the guarantee set at € 50,000; • the reduction of the time for the integration of the guarantee to 7 business days; • expansion of the payment punctuality observation period to 12 months; • possibility for users to issue a first-request bank or insurance surety as a guarantee.
With Resolutions 272/2019/R/eel – Provisions functional to the extension of the ex-ante verification of the annual average power value with reference to the switching requests submitted by each dispatching user – and 494/2019/R/eel – Approval of the proposal by Terna of the method for correlating the financial value of the guarantees given by the dispatching user to its equivalent in mw for the purposes of determining the value of max PMAu for each user – the Authority introduced the concept of Annual Average Power (AAP) value for which the dispatching user is required to issue guarantees. The request for switching is now also subject to the IWS’s verification of the AAP value, which cancels the request in the event of a negative outcome. The Authority plans to extend the same mechanism to the transport contract.
With Resolution no. 270/2019/R/com – Establishment of the electricity and natural gas consumption portal in implementation of Italian Law 205/2017 – the Authority announced the availability of the “Consumption Portal” as of 1 July 2019 (www.consumienergia.it), an instrument integrated with the IIS and managed by the Single Buyer in order to “empower” the
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final customer with respect to its electricity and gas consumption (regardless of the level of consumption) and to comply with the provisions of Italian Legislative Decree 102/2014 on the right of the final customer to access its use data. Subsequent developments allowed access to the Portal by third parties authorised by the customer (e.g. energy service providers) and the development of synergies with the Offers Portal, so that customer annual expenditure estimates are calculated on the basis of actual past consumption.
With Resolution no. 626/2018/R/eel – Further deferral of the completion of the reform of the tariff components to cover general system charges for domestic electricity customers, as set out in the Authority’s Resolution no. 582/2015/R/eel – the Authority further delayed the completion of the tariff reform for general system charges for domestic customers until 2020. In the meantime, from 1 January 2019 only DISPbt (euro/POD) will apply to resident domestic customers, while the tariff structure already in force in 2018 will be confirmed for customers participating in the heat pump tariff experiment (non-staggered general charges and DISTBT with monomial structure for residents and non-residents).
With resolution 712/2018/R/com – Interventions following the provisions of Italian Law 205/2017 on electronic invoicing with regard to Bill 2.0 for the standard network code for the electricity transport service and for the standard network code for natural gas distribution – the Authority established the first functional provisions to coordinate the regulation of summary bills for end customers and electricity and natural gas transport invoices issued by distributors with new laws in force since 1 January 2019 on electronic invoicing as envisaged by the 2018 Italian Budget Law. With the subsequent resolution 246/2019/R/com – Additions andv amendments to the Authority’s resolution no. 712/2018/R/com on electronic invoicing following the provisions of Italian Law 205/2017 – the Authority returned to the subject, supplementing and amending some technical aspects of the previous resolution: • the possibility to include in the “invoice file” (replacing the summary bill) the corresponding alphanumeric code (unique and encrypted); • the inclusion of the reference to the corresponding electronic invoice number submitted to the SDI in the summary bill; • the obligation to record and archive the summary bill, details and accounting documents of the distribution service for at least 10 years.
Natural Gas
Italian regulations enacted in May 2000, by means of the Legislative Decree No. 164/2000 (the "Letta Decree") - implementing EU directives on gas sector liberalisation (Directive 1998/30/EC) - introduced competition into the Italian natural gas market through the liberalisation of the import, export, transport, dispatching, and sale of gas. The liberalisation process was successively strengthened by Directive 2003/55/EC, which introduced, on the one hand, stricter unbundling obligations on companies operating in the gas transport, distribution and sale sectors and, on the other hand, incentives for new import infrastructure. The authorities responsible for turning this regulation into practice are the Ministry of Economic Development and AEGG.
Sale
As of 1 January 2003, companies that intend to sell gas to end customers must obtain a licence from the Ministry of Productive Activities. Authorisation is issued, on the basis of criteria set by the Ministry of Productive Activities, provided that the company meets certain requirements
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(e.g. appropriate technical and financial capacity) and may only be refused on objective and non-discriminatory grounds.
From 1 January 2002, only companies that are not engaged in any other activity in the natural gas sector, other than as importers, drillers or wholesalers, may sell gas.
Law No. 99/2009 provided for the constitution of a market exchange for the supply and sale of natural gas. It envisages that the Electricity Market Operator, in compliance with the principles of transparency, competition and non-discrimination, would be designated as manager of the natural gas exchange market.
Accordingly, the Legislative Decree issued by the MED on 18 March 2010 established the trading platform for the import gas exchange (P-Gas), managed by the Energy Market Operator ("GME") in compliance with the principles of transparency, competition and non- discrimination.
Afterwards, in October 2010, a true gas exchange started, with the GME taking on the role of central counterparty (M-Gas platform, structured in day ahead market - MGP-Gas – and in intraday market – MI-Gas).
In December 2011, the Gas balancing market on the PB-Gas platform started, managed by GME and with Snam Rete Gas playing a role of central counterparty. The balancing market introduces a ex-post gas exchange session aimed at balancing the whole gas system and, accordingly, shipper positions (the part of the supply chain that produces or imports gas, or buys it from domestic producers or other shippers) by buying or selling stored gas. Through the central platform, accessible to all operators, they may acquire, on the basis of economic merit, the resources required to balance their positions and ensure the equilibrium constant of the network, for the purposes of system security.
By means of Resolution No. 71/11, the ARERA introduced a set of new rules to limit the application of the economic conditions to residential customers, non-residential customers with a consumption level below 50,000 cubic meter/year and users involved in providing public assistance services.
Heat and Services
Legislative Decree 102/14 granted ARERA regulatory and enforcement powers in the areas of district heating (teleriscaldamento), cooling and hot water for domestic use. In particular, the regulatory powers granted to ARERA relate to:
• the continuity, quality and safety of the service, the plants and the accounting systems;
• the criteria to determine the user rates for connection to the network and the methods to exercise the relevant right of disconnection;
• the methods through which the network operators publish the prices for the provision, the connection, the disconnection and the accessory machinery for heating systems;
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• the reference conditions for the connection to the district heating and cooling networks applicable to new generation heating units;
• the rates for the sale of heating in case of the obligation to connect to the district heating and cooling networks imposed by Regions or Municipalities;
• the regulation of the measurement and accounting systems of heating/cooling/water consumptions for health purposes;
• the regulation of invoicing information and documents.
Pursuant to Legislative Decree 102/14, ARERA also exercises control, inspection and sanction powers provided by Law 481/95, as well as the sanction powers provided by Article 16 of Legislative Decree 102/14.
With Resolution 271/2019/R/gas – Provisions relating to the process of making available the technical data of the redelivery points and the measurement data to the Integrated Information System and modification of the communication standards with reference to the gas sector – and subsequent Resolution 6/2019 – Modifications and integrations to the Operating Instructions and the xml structures to be used for the exchange of information with respect to the communication standards for the natural gas sector – the Authority gave a mandate to the IWS Operator for the publication of new data files, which, from February 2020, will be used for: • the provision of technical data, information and measurement data collected during the replacement of the meter and other technical service; • the provision of the periodic measurement data collected in accordance with the TIVG, the self-readings made by end customers, the measurement data collected during switching, as well as other technical services requiring the collection of measurement data; • making available the corrections to the measurement data submitted with the two previous flows. At the same time, the Authority has defined the procedures and timing that, given the specified starting date, allow the distribution companies to transfer the largest number of measurements to the IIS to be used for their settlements.The effective date of the new data files was later extended to 1 June 2020 with Resolution no. 493/2019/R/gas – Update of the methods and timelines for making available the technical data of redelivery points and measurement data for the gas sector to the Integrated Information System.
With Resolution 406/2018/R/com – Entry into force of the regulation of the indemnification system within the Integrated Information System, for the electricity and natural gas sectors – the Authority established that from 1 June 2019 the processes relating to the indemnification system would be managed exclusively within the IIS, even for the gas sector. Reform of charges for domestic customers
During the last years, ARERA continued to deepen its activity on the district heating service with the following steps.
2018 was a year of intense development with regard to regulation in the district heating sector, attributed to ARERA by Italian Legislative Decree 102/2014. During the year and after an intense activity of analysis and discussion with operators and associations, ARERA began to outline the guidelines for the future regulation of district heating. With resolution 24/2018/R/tlr and subsequent resolution 277/2018/R/tlr, ARERA issued the “Consolidated Law on the Regulation of the criteria for determining the connection fees and the procedures for the
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exercise by the user of the right of withdrawal for the regulatory period 1 June 2018-31 December 2021 (TUAR)” in which it defines the regulation of the criteria for determining the connection fees and the procedures for the exercise by the user of the right to deactivate the supply and disconnection from the district heating network for the regulatory period 1 October 2018-December 2020.
With resolution no. 574/2018/R/tlr of 13 November 2018, ARERA defined the information obligations of parties operating in the district heating and cooling sector with regard to the Operators’ and Territorial Register and the procedures for submitting applications for exclusion of networks from the Authority’s regulation. The document, called “Information requirements for district heating and cooling operators (OITLR)” establishes that: a) parties operating in the district heating sector that have not yet registered in the “Operators’ Register” must do so by 31 December 2018 based on the new provisions; b) network operators must verify and, where necessary, supplement or update the information relating to each network they manage by 31 March 2019 at the latest using the “Anagrafica Territoriale (ATT)” computer protocol.
With Resolution 661/2018/R/tlr, ARERA defined the regulation of the commercial quality of the district heating service for the regulatory period 1 July 2019-December 2021 and provided for the initiation of a procedure for the revaluation of the provisions on the exercise of the right of withdrawal established by the TUAR and some amendments thereto. ARERA has also launched a consultation on the technical quality of district heating, DCO 691/2018/R/ tlr, which is expected to be completed in 2019. Unlike the regulation of other regulated sectors, the regulation of district heating lacks the typical tariff oversight, because while the sector is regulated it operates under market conditions and not according to tariffs established by ARERA. Therefore activities related to quality are ARERA’s main contributions to the sector. In 2019, the regulator published the following integrated texts relating to the sector: 1) RQTT – Regulation of the technical quality of district heating and cooling services – resolution 548/2019/R/tlr and 2) TITT – Transparency of district heating and cooling services – resolution 313/2019/R/tlr.
With resolution 313/2019/R/tlr, the Regulatory Authority for Energy Networks and Environment (ARERA) defines the transparency regulations for the district heating and cooling sector for the regulatory period 1 January 2020-31 December 2023. The scope of the intervention includes the minimum contents of supply contracts and invoicing documents, the methods of publication of prices applied by operators and other information concerning the quality of service and environmental performance. It is also envisaged that the Authority will launch a price monitoring system.
With resolution 548/2019/R/tlr (RQTT), ARERA adopted the regulation of the technical quality of the district heating service, with particular reference to safety and continuity of the service, for the regulatory period 1 July 2020-31 December 2023.
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TAXATION
The following is a general description of certain Italian, US, Luxembourg and EU tax considerations relating to the Notes. They apply to a holder of Notes only if such holder purchases its Notes under this Programme. It is a general summary related to certain categories of investors in the Notes and it does not cover other matters and all categories of investors in the Notes and it does not purport to be a complete analysis of all tax considerations relating to the Notes, whether in those countries or elsewhere. It does not discuss every aspect of taxation that may be relevant to a holder of Notes if such holder is subject to special circumstances or if such holder is subject to special treatment under applicable law. Furthermore, it does not cover the tax regime of notes similar to shares. This summary assumes that the Issuer is resident only in Italy for tax purposes (without a permanent establishment abroad) and that the Issuer is a company listed on the Italian Stock Exchange and is organised (and its business will be conducted) as outlined in this Base Prospectus. Changes in the Issuer’s tax residence, organisational structure or in the manner in which the Issuer conducts its business may invalidate this summary.
Prospective purchasers of Notes should consult their own tax advisers as to which countries’ tax laws could be relevant to acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes and the consequences of such actions under the tax laws of those countries.
This summary is based upon the law as in effect on the date of this Base Prospectus and is subject to any change in law that may take effect after such date which changes could be made on a retroactive basis. The issuer will not update this summary to reflect changes in laws and if any such changes occur the information in this summary could become invalid.
Taxation in the Republic of Italy
Tax treatment of the Notes
Legislative Decree No. 239 of 1 April 1996, as subsequently amended ("Decree 239") provides for the applicable regime with respect to the tax treatment of interest, premium and other income (including the difference between repayment amount and the issue price) from notes falling within the category of bonds (obbligazioni) or debentures similar to bonds (titoli similari alle obbligazioni), issued, inter alia, (i) by public entities transformed in limited companies, pursuant to specific law provisions and (ii) by company listed in a regulated market.
Decree 239 applies, inter alia, provided that:
(i) interest, premium and other income relating to notes are not entirely linked to the economic performance of the Issuer or of other companies belonging to the same group as the Issuer or of the business in relation to which the Notes have been issued;
(ii) bonds and debentures similar to bonds are securities that incorporate an unconditional obligation to pay, at redemption, an amount not lower than their nominal value and which do not grant the holder any direct or indirect right of participation to (or of control of) to management of the Issuer or of the business in relation to which they have been issued.
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Italian resident Noteholders
Where the Italian resident Noteholder is (a) an individual not engaged in an entrepreneurial activity to which the relevant Notes are connected; (b) a non commercial partnership; (c) a non commercial private or public institution; or (d) an investor exempt from Italian corporate income taxation (unless the Noteholders under (a), (b), or (c) opted for the application of the “risparmio gestito” regime — see under “Capital gains tax”, below), interest, premium and other income relating to the Notes, paid, are subject to a substitute tax, referred to as imposta sostitutiva, levied at the rate of 26 per cent. In the event that Noteholders described under (a) and (c) above are engaged in an entrepreneurial activity to which the Notes are connected, the imposta sostitutiva applies as a provisional tax and may be deducted from the taxation on income due.
Subject to certain limitations and requirements (including a minimum holding period), Italian resident individuals not acting in connection with an entrepreneurial activity may be exempt from any income taxation, including the imposta sostitutiva, on interest, premium and other income relating to the Notes if the Notes are included in a long-term savings account (piano di risparmio a lungo termine) that meets the requirements set forth in Article 1(100-114) of Law No. 232 of 11 December 2016 (the “Finance Act 2017”), or in Article 1(211-215) of Law no. 145 of 30 December 2018 (the “Finance Act 2019”), or in Article 13-bis of Decree-Law no. 124 of 26 October 2019 (the “Tax Decree 2019”) and Ministerial Decree of 30 April 2019, as subsequently amended (lastly by Article 136 of Law Decree No. 34 of 19 May 2020), depending on the date of incorporation of the relevant “piano di risparmio a lungo termine”.
Where an Italian resident Noteholder is a company or similar commercial entity (including commercial trusts) or a permanent establishment in Italy of a foreign company to which the Notes are effectively connected and the Notes are deposited with an authorised intermediary, interest, premium and other income from the Notes will not be subject to imposta sostitutiva, but must be included in the relevant Noteholder’s income tax return and are therefore subject to general Italian corporate income taxation (and, in certain circumstances, depending on the “status” of the Noteholder, also to the regional tax on productive activities (“IRAP”).
Under the current regime provided by Law Decree No. 351 of 25 September 2001 converted into law with amendments by Law No. 410 of 23 November 2001 (“Decree 351”), as clarified by the Italian Revenue Agency (Agenzia delle Entrate) through Circular No. 47/E of 8 August 2003 and Circular No. 11/E of 28 March 2012, payments of interest, premiums or other proceeds in respect of the notes made to Italian resident real estate investment funds established pursuant to Article 37 of Legislative Decree No. 58 of 24 February 1998, as amended and supplemented, and Article 14-bis of Law No. 86 of 25 January 1994 and Italian Real Estate SICAFs (“Real Estate SICAFs”) (“Società di investimento a capitale fisso”) are subject neither to imposta sostitutiva nor to any other income tax in the hands of a real estate fund, but subsequent distributions made in favour of unitholders or shareholders are subject, in certain circumstances, to a withholding tax of 26 per cent. Furthermore, under some conditions, incomes realised by the real estate funds are subject to taxation in the hands of unitholders or shareholders regardless of the distribution of the proceeds.
If the investor is resident in Italy and is an open-ended or closed-ended investment fund or a SICAF (“Società d’investimento a capital fisso”) or a SICAV (“Società di investimento a capitale variabile”) established in Italy and either (i) the fund, the SICAF or the SICAV or (ii) their manager is subject to the supervision of a regulatory authority (the “Italian Fund”), and the relevant Notes are held by an authorised intermediary, interest, premium and other income
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accrued during the holding period on the Notes will not be subject to imposta sostitutiva, but must be included in the management results of the Italian Fund. The Italian Fund will not be subject to taxation on such results but a substitute tax of 26 per cent. will apply, in certain circumstances, to distributions made in favour of unitholders or shareholders (the “Collective Investment Fund Substitute Tax”), with certain adjustments.
Where an Italian resident Noteholder is a pension fund (subject to the regime provided for by Article 17 of the Legislative Decree No. 252 of 5 December 2005) and the Notes are deposited with an authorised intermediary, interest, premium and other income relating to the Notes and accrued during the holding period will not be subject to imposta sostitutiva, but must be included in the result of the relevant portfolio accrued at the end of the tax period, to be subject to a 20 per cent. substitute tax.
Subject to certain limitations and requirements (including a minimum holding period), Italian pension funds and social security institutions, regulated under Legislative Decree No. 509 of 30 June 1994, and Legislative Decree No. 103 of 10 February 1996, may be exempt from any income taxation, on interest, premium and other income relating to the Notes if the Notes are included in a long-term savings account (piano di risparmio a lungo termine) that meets the requirements set forth in Article 1(100-114) of the Finance Act 2017 or in Article 1(211-2015) of the Finance Act 2019, or in Article 13-bis of Decree-Law no. 124 of 26 October 2019 (the “Tax Decree 2019”) and Ministerial Decree of 30 April 2019, as subsequently amended (lastly by Article 136 of Law Decree No. 34 of 19 May 2020), depending on the date of incorporation of the relevant “piano di risparmio a lungo termine”.
Furthermore, subject to certain limitations and requirements (including a minimum holding period), Italian pension funds and social security institutions regulated under Legislative Decree No. 509 of 30 June 1994 and Legislative Decree No. 103 of 10 February 1996, may be exempt from any income taxation on distribution made by certain collective investment funds which mainly invest in specific qualified assets and hold (not mainly) notes. Pursuant to Decree 239, imposta sostitutiva is applied by banks, SIMs, fiduciary companies, SGRs, stockbrokers and other entities identified by a decree of the Ministry of Economy and Finance (each an “Intermediary”).
An Intermediary must (a) be resident in Italy or be a permanent establishment in Italy of a non Italian resident financial intermediary; and (b) intervene, in any way, in the collection of interest or in the transfer of the Notes. For the purpose of the application of the imposta sostitutiva, a transfer of Notes includes any assignment or other act, either with or without consideration, which results in a change of the ownership of the relevant Notes or in a change of the Intermediary with which the Notes are deposited.
Where the Notes are not deposited with an Intermediary, the imposta sostitutiva is applied and withheld by any entity paying interest to a Noteholder.
Non Italian tax resident Noteholders Where the Noteholder is a non Italian tax resident, without a permanent establishment in Italy to which the Notes are connected, an exemption from the imposta sostitutiva applies provided that the non Italian tax resident beneficial owner is either
(a) resident, for tax purposes, in a country which allows for a satisfactory exchange of information with Italy (the “White List States”) as listed in the Italian Ministerial Decree
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dated 4 September 1996 as recently amended by Italian Ministerial Decree dated 23 March 2017, and as amended from time to time periodically according to Article 11(4)(c) of Decree 239 as amended by Legislative Decree No. 147 of September 2015; or
(b) an international body or entity set up in accordance with international agreements which have entered into force in Italy; or
(c) a Central bank or an entity which manages, inter alia, the official reserves of a foreign State; or
(d) an institutional investor which is established in a country which allows for a satisfactory exchange of information with Italy, even if it does not possess the status of a taxpayer in its own country of establishment.
In order to ensure gross payment, certain procedural requirements must be satisfied. In brief, non resident investors must be the beneficial owners of payments of interest, premium or other income and (a) deposit, directly or indirectly, the Notes with a bank or a SIM or a permanent establishment in Italy of a non resident bank or SIM or with a non resident operator of a clearing system having appointed as its agent in Italy for the purposes of Decree 239 a resident bank or SIM or a permanent establishment in Italy or a non resident bank or SIM which are in contact via computer with the Ministry of Economy and Finance and (b) timely file with the relevant depositary a statement of the relevant Noteholder, to be provided only once, until revoked or withdrawn, in which the Noteholder declares to be eligible to (and requires) benefit from the applicable exemption from imposta sostitutiva. Such statement, which is not requested for international bodies or entities set up in accordance with international agreements which have entered into force in Italy or in the case of foreign Central Banks or entities which manage the official reserves of a foreign State, must comply with the requirements set forth by Ministerial Decree 12 December 2001. In any case specific procedures shall have to be verified on a case by case basis.
The imposta sostitutiva will be applicable at the rate of 26 per cent. to interest, premium or other income paid to Noteholders who do not qualify for the exemption.
Noteholders who are subject to the substitute tax might, nevertheless, be eligible for a total or partial relief under an applicable tax treaty between the Republic of Italy and the country of residence of the relevant Noteholder.
Furthermore, on 7 June 2017, over 70 states signed the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting. Atypical Securities
Any proceeds relating to Notes that are not deemed to be bonds (obbligazioni), debentures similar to bonds (titoli similari alle obbligazioni), shares or securities similar to shares pursuant to Article 44 of Presidential Decree No. 917 of 22 December 1986 may be subject to a withholding tax, levied at the rate of 26 per cent.
Where the Noteholder is (a) an Italian individual engaged in an entrepreneurial activity to which the Notes are connected, (b) an Italian company or a similar Italian commercial entity, (c) a permanent establishment in Italy of a foreign entity, (d) an Italian commercial partnership or (e) an Italian commercial private or public institution, such withholding tax is a provisional withholding tax. In all other cases, including when the Noteholder is a non Italian resident, the
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withholding tax is a final withholding tax. For non Italian resident Noteholders, the withholding tax rate may be reduced by any applicable tax treaty.
Capital gains tax
Any gain obtained from the sale or transfer or redemption of the Notes if realised (i) by an Italian company or (ii) a similar commercial entity (including the Italian permanent establishment of foreign entities to which the Notes are connected) or (iii) Italian resident individuals engaged in an entrepreneurial activity to which the Notes are connected, would be treated as part of the taxable income subject to corporation tax (IRES) generally applied at a rate equal to 24% - (save for the cases in which the additional IRES rate equal to 10,5% applies). In certain cases, (depending on the status of the Noteholder), capital gains are also included in the taxable net value of production of Italian resident corporate entities (including a permanent establishment in Italy of a foreign entity to which the Notes are effectively connected) for IRAP purposes, generally applying at 3.9% rate (depending on the activity performed and where the latter is carried out). The gains are calculated as the difference between the sale price and the relevant tax basis of the Notes. Upon fulfilment of certain conditions, the gains may be taxed in equal instalments over up to five fiscal years for IRES purposes.
Where an Italian resident Noteholder is (i) an individual not holding the Notes in connection with an entrepreneurial activity; (ii) a non commercial partnership; (iii) a non commercial private or public institution, any capital gain realised by such Noteholder from the sale or redemption of the Notes would be subject to an imposta sostitutiva, levied at the current rate of 26 per cent. pursuant to the provisions set forth by the Legislative Decree of the 21 November 1997, No. 461 (“Decree 461”).
For the purposes of determining the taxable capital gain, any interest on the Notes accrued and unpaid up to the time of, respectively, the purchase and the sale of the Notes must be deducted both from the purchase price and the sale price.
In respect of the application of the imposta sostitutiva, Noteholders under (i) to (iii) just above, under certain conditions, may opt for one of the three regimes described below.
Under the tax declaration regime (regime della dichiarazione), which is the default regime for the relevant Noteholders, the imposta sostitutiva on capital gains will be chargeable, on a cumulative basis, on all capital gains, net of any incurred capital loss, realised by the relevant Noteholders pursuant to all sales or transfer or redemptions of the Notes carried out during any given tax year. Relevant Noteholders must indicate the overall capital gains realised in any tax year, net of any relevant incurred capital loss, in the annual tax return and pay imposta sostitutiva on such gains together with any balance of income tax due for such year. Capital losses in excess of capital gains may be carried forward against capital gains realised in any of the four succeeding tax years.
As an alternative to the tax declaration regime, relevant Noteholders may elect to pay the imposta sostitutiva separately on capital gains realised on each sale or redemption of the relevant Notes (the “risparmio amministrato” regime). Such separate taxation of capital gains is allowed subject to (i) Notes being deposited with Italian banks, SIMs or certain authorised financial intermediaries (including permanent establishments in Italy of foreign intermediaries); and (ii) an express election for the risparmio amministrato regime being timely made in writing by the relevant Noteholder. The depository is responsible for accounting for
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imposta sostitutiva in respect of capital gains realised on each sale or transfer or redemption of Notes (as well as in respect of capital gains realised upon the revocation of its mandate), net of any incurred capital loss, and is required to pay the relevant amount to the Italian tax authorities on behalf of the taxpayer, deducting a corresponding amount from the proceeds to be credited to the Noteholder or using funds provided by the Noteholder for this purpose. Under the risparmio amministrato regime, where a sale or transfer or redemption of Notes results in a capital loss, such loss may be deducted from capital gains subsequently realised, within the same securities management, in the same tax year or in the following tax years up to the fourth. Under the risparmio amministrato regime, the Noteholder is not required to declare the capital gains in its annual tax return.
Any capital gains realised by relevant Noteholders who have entrusted the management of their financial assets, including the Notes, to an authorised intermediary and have opted for the so called “risparmio gestito” regime will be included in the computation of the annual increase in value of the managed assets accrued, even if not realised, at year end, subject to a 26 per cent. substitute tax, to be paid by the managing authorised intermediary. Under the risparmio gestito regime, any depreciation of the managed assets accrued at year end may be carried forward against increase in value of the managed assets accrued in any of the four succeeding tax years. Under the risparmio gestito regime, the Noteholder is not required to declare the capital gains realised in its annual tax return.
Subject to certain limitations and requirements (including a minimum holding period), Italian resident individuals not engaged in an entrepreneurial activity may be exempt from Italian capital gain taxes, including the imposta sostitutiva, on capital gains realised upon sale or redemption of the Notes if the Notes are included in a long-term savings account (piano di risparmio a lungo termine) that meets the requirements set forth in Article 1(100-114) of the Finance Act 2017 or in Article 1(211–215) of the Finance Act 2019, or in Article 13-bis of Decree-Law no. 124 of 26 October 2019 (the “Tax Decree 2019”) and Ministerial Decree of 30 April 2019, as subsequently amended (lastly by Article 136 of Law Decree No. 34 of 19 May 2020), depending on the date of incorporation of the relevant “piano di risparmio a lungo termine”.
Any capital gains realised by a Noteholder which is an Italian Fund will not be subject to imposta sostitutiva, but will be included in the result of the relevant portfolio. Such result will not be taxed with the Italian Fund, but subsequent distributions in favour of unitholders or shareholders may be subject to the Collective Investment Fund Substitute Tax (with certain adjustments).
Any capital gains realised by a Noteholder which is an Italian pension fund (subject to the regime provided for by Article 17 of the Legislative Decree No. 252 of 5 December 2005) will be included in the result of the relevant portfolio accrued at the end of the tax period, to be subject to the 20 per cent. substitute tax.
Subject to certain limitations and requirements (including a minimum holding period), Italian pension funds and social security institutions regulated under Legislative Decree No. 509 of 30 June 1994 and Legislative Decree No. 103 of 10 February 1996, may be exempt from any income taxation, on interest, premium and other income relating to the Notes if the Notes are included in a long-term savings account (piano di risparmio a lungo termine) that meets the requirements set forth in the Finance Act 2017 or in the Finance Act 2019 and Ministerial Decree of 30 April 2019, or in Article 13-bis of Decree-Law no. 124 of 26 October 2019 (the “Tax Decree 2019”) as subsequently amended (lastly by Article 136 of Law Decree No. 34 of
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19 May 2020), depending on the date of incorporation of the relevant “piano di risparmio a lungo termine”.
Furthermore, subject to certain limitations and requirements (including a minimum holding period), Italian pension funds and social security institutions regulated under Legislative Decree No. 509 of 30 June 1994 and Legislative Decree No. 103 of 10 February 1996, may be exempt from any income taxation on distribution made by certain collective investment funds which mainly invests in specific qualified assets and hold (not mainly) notes.
Any capital gains realised by Italian resident real estate fund and the Real Estate SICAFs to which the provisions of Decree 351, as subsequently amended, apply will be subject neither to imposta sostitutiva nor to any other income tax at the level of the real estate fund or Real Estate SICAFs.
Capital gains realised by non Italian resident Noteholders from the sale, early redemption or redemption of Notes issued by an Italian resident Issuer are not subject to Italian taxation, provided that the Notes are traded on regulated markets.
Capital gains realised by non Italian resident Noteholders from the sale, early redemption or redemption of Notes not traded on regulated markets are not subject to the imposta sostitutiva, provided that the effective beneficiary: (a) is resident in a country which allows for a satisfactory exchange of information with Italy; or (b) is an international entity or body set up in accordance with international agreements which have entered into force in Italy; or (c) is a Central Bank or an entity which manages, inter alia, the official reserves of a foreign State; or (d) is an institutional investor which is established in a country which allows for a satisfactory exchange of information with Italy, even if it does not possess the status of a taxpayer in its own country of establishment.
If none of the conditions above are met, capital gains realised by non Italian resident Noteholders from the sale or transfer or redemption of Notes issued by an Italian resident Issuer are subject to the imposta sostitutiva at the current rate of 26 per cent.
In any event, non Italian resident individuals or entities without a permanent establishment in Italy to which the Notes are connected, that may benefit from a double taxation treaty with Italy providing that capital gains realised upon the sale, early redemption or redemption of Notes are to be taxed only in the country of tax residence of the recipient, will not be subject to imposta sostitutiva in Italy on any capital gains realised upon the sale, early redemption or redemption of Notes.
Inheritance and gift taxes
Pursuant to Law Decree No. 262 of 3 October 2006, converted into Law No. 286 of 24 November 2006, the transfers of any valuable asset (including shares, bonds or other securities) as a result of death or donation are taxed as follows:
(a) transfers in favour of spouses and direct descendants or direct ancestors are subject to an inheritance and gift tax applied at a rate of 4 per cent. on the value of the inheritance or the gift exceeding, for each beneficiary, €1,000,000;
(b) transfers in favour of relatives to the fourth degree or relatives in law to the third degree, are subject to an inheritance and gift tax applied at a rate of 6 per cent. on the entire
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value of the inheritance or the gift. Transfers in favour of brothers/sisters are subject to the 6 per cent. inheritance and gift tax on the value of the inheritance or the gift exceeding, for each beneficiary, €100,000; and
(c) any other transfer is, in principle, subject to an inheritance and gift tax applied at a rate of 8 per cent. on the entire value of the inheritance or the gift.
If the transfer is made in favour of persons with severe disabilities, the tax is levied at the rate mentioned above in (a), (b) and (c) on the value exceeding, for each beneficiary, €1,500,000.
A particular regime could be applicable in relation to the indirect donation ("liberalità indirette").
Moreover, Law No. 112 of 24 June 2016 provides some specific reliefs for contribution in trust incorporated in favour of persons with severe disabilities.
Transfer tax
Following the repeal of the Italian transfer tax, contracts relating to the transfer of securities are subject to the following registration tax: (i) public deeds and notarised deeds are subject to fixed registration tax at a lump sum of €200.00; (ii) private deeds are subject to registration tax only in case of use or voluntary registration.
Stamp duty (bollo)
Pursuant to Article 13 of the Tariff attached to Presidential Decree No. 642 of 26 October 1972 ("Decree 642"), a proportional stamp duty applies on an annual basis to the periodic reporting communications sent by financial intermediaries to their clients for the Notes deposited therewith and in any case once per year. As of 1 January 2014, the stamp duty applies at a rate of 0.2 per cent. and, for taxpayers different from individual, cannot exceed €14,000; this stamp duty is determined on the basis of the market value or – if no market value figure is available – the nominal value or redemption amount of the Notes held. Based on the wording of the law and the implementing decree issued by the Italian Ministry of Economy on 24 May 2012, the stamp duty applies to any investor who is a "client" (as defined in the regulations issued by the Bank of Italy on 9 February 2011) of an entity that exercises in any form a banking, financial or insurance activity within the Italian territory.
Wealth Tax on securities deposited abroad (IVAFE)
According to the provisions set forth by Law No. 214 of 22 December 2011, as amended and supplemented (lastly by Article 136 of Law Decree No. 34 of 19 May 2020), individuals, non- profit entities and certain partnerships (società semplici or similar partnerships in accordance with Article 5 of Presidential Decree No. 917 of 22 December 1986) resident in Italy for tax purposes holding the Notes outside the Italian territory are required to pay an additional tax at a rate of 0.2 per cent. (for taxpayers different from individual, cannot exceed €14,000). In this case the above mentioned stamp duty provided for by Article 13 of the Tariff attached to Decree 642 does not apply.
This tax is calculated on the market value of the Notes at the end of the relevant year or – if no market value figure is available – the nominal value or the redemption value of such financial assets held outside the Italian territory. Taxpayers are entitled to an Italian tax credit equivalent
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to the amount of wealth taxes paid in the State where the financial assets are held (up to an amount equal to the Italian wealth tax due).
Are excluded from the scope of the Wealth Tax the financial assets held abroad if administered by Italian financial intermediaries pursuant to an administration agreement. In this case, the above mentioned stamp duty provided for by Article 13 of the Tariff attached to Decree 642 does apply.
Tax monitoring obligations
According to the Law Decree No. 167 of 28 June 1990, converted with amendments into Law No. 227 of 4 August 1990, as amended from time to time, individuals, non-profit entities and certain partnerships (società semplici or similar partnerships in accordance with Article 5 of Presidential Decree No. 917 of 22 December 1986) resident in Italy for tax purposes, under certain conditions, are required to report for tax monitoring purposes in their yearly income tax return (or, in case the income tax return is not due, in a proper form that must be filed within the same time as prescribed for the income tax return) the amount of investments (including the Notes) directly or indirectly held abroad.
The requirement applies also where the persons above, being not the direct holder of the financial instruments, are the actual owner of the instrument.
Furthermore, the above reporting requirement is not required to comply with respect to: (i) Notes deposited for management with qualified Italian financial intermediaries; (ii) contracts entered into through the intervention of qualified Italian financial intermediaries, upon condition that the items of income derived from the Notes have been subject to tax by the same intermediaries.
EU Savings Tax Directive and exchange of information regime
On 10 November 2015, the Council of the European Union adopted a Council Directive (EU) 2015/2060 of 10 November 2015, which repeals (from 1 January 2017 in the case of Austria and from 1 January 2016 in the case of all other EU Member States) the EC Council Directive 2003/48/EC on the taxation of savings income (the "EU Savings Tax Directive") in order to prevent overlap between the EU Savings Directive and a new automatic exchange of information regime provided by Council Directive 2011/16/EU as amended by Council Directive 2014/107/EU ("Amending Directive").
Under EU Savings Tax Directive Member States were required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State or to certain limited types of entity known as "residual entities" as defined in article 4.2 of the EU Savings Tax Directive established in that other Member State.
A number of non EU countries, and certain dependent or associated territories of certain Member States, have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person
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for, an individual resident or certain limited types of entity established in one of those territories. Furthermore, the EU and Switzerland, entered into an agreement for exchange of information as of 1 January 2017.
In particular, on 24 March 2014, the Council of the European Union formally adopted the Amending Directive which has amended the Council Directive 2011/16/EU in accordance with the Global Standard released by Organization for Economic Co-operation and Development in July 2014 (Common Reporting Standard). Member States had until 1 January 2016 to adopt the national legislation necessary to comply with the Amending Directive. The changes made under the Amending Directive include extending the scope of the EU Savings Tax Directive to payments made to, or collected for, certain other entities and legal arrangements. They also broaden the definition of "interest payment" to cover income that is equivalent to interest.
Implementation in Italy of the Amending Directive and exchange of information
Article 28 of Law 7 July 2016, No. 122 (published on the Italian Official Gazette 8 July 2016, No. 158 and in force as of 23 July 2016) as of 1 January 2016, repeals the Legislative Decree No. 84 of 18 April 2005 ("Decree 84") which implemented in Italy the EU Savings Directive. Such law also set forth some specific rules governing the transitional period.
Under Decree No. 84, subject to a number of important conditions being met, in the case of interest paid to individuals which qualified as beneficial owners of the interest payment and were resident for tax purposes in another Member State, Italian qualified paying agents had to report to the Italian tax authorities details of the relevant payments and personal information on the individual beneficial owner and had not to apply the withholding tax. Such information was transmitted by the Italian tax authorities to the competent foreign tax authorities of the State of residence of the beneficial owner.
On 9 July 2015, the Italian Parliament adopted Law No. 114, which delegates the Italian Government to implement in Italy, certain EU Directives, including the Amending Directive, by January 1, 2016. Such Law delegates the Italian Government to implement in Italy the Amending Directive, which is aimed at broadening the intra-EU automatic exchange of information, in order to fight cross-border tax fraud and evasion. With Ministerial Decree 28 December 2015 (published on the Italian Official Gazette 31 December 2015, No. 303) Italy has implemented the Amending Directive as of 1 January 2016. In this respect, the Ministerial Decree 24 April 2018 (published on the Official Gazette No. 104 of 7 May 2018) amended the Ministerial Decree 28 December 2015, updating the list of (i) jurisdictions that are object of automatic exchange of information and of (ii) jurisdictions with which such exchange takes place ("giurisdizioni partecipanti"). Furthermore, Italy entered into several agreements for exchange of information also with non EU countries. Investors should consult their professional advisers also on this respect. The proposed financial transactions tax ("FTT")
The European Commission has published a proposal for a Directive for a common FTT in Belgium, Germany, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “participating Member States”).
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The proposed FTT has very broad scope and could, if introduced in its current form, apply to certain dealings in Notes (including secondary market transactions) in certain circumstances. The issuance and subscription of Notes should, however, be exempt.
Under current proposals the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in Notes where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.
The FTT proposal remains subject to negotiation between the participating Member States and is the subject of legal challenge. It may therefore be altered prior to any implementation, the timing of which remains unclear.
According to what reported the Note No. 15082/18 released on December 6, 2018, Council of the European Union clarified that at the High-Level Working Party on tax question, participating Member States indicated that they are evaluating the impact of the latest international developments and possible options, in particular as far as FTT revenue expectations are concerned.
On December 9, 2019, the German Finance Minister, Olaf Scholz, issued a revised proposal for a Council Directive regarding the introduction of a common FTT to the participating Member States in the so-called enhanced cooperation procedure. According to specialized press release the revised proposal should include an optional exemption for pension schemes and a new system for mutualization of the FTT revenues. Moreover further exclusions are under discussion.
Additional EU Member States may decide to participate. Prospective holders of Notes are advised to seek their own professional advice in relation to the FTT.
Foreign Account Tax Compliance Act
Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986 ("FATCA") impose a new reporting regime and potentially a 30 per cent. withholding tax with respect to certain payments to (i) any non U.S. financial institution (a "foreign financial institution", or "FFI" (as defined by FATCA)) that does not become a "Participating FFI" by entering into an agreement with the U.S. Internal Revenue Service ("IRS") to provide the IRS with certain information in respect of its account holders and investors or is not otherwise exempt from or in deemed compliance with FATCA and (ii) any investor (unless otherwise exempt from FATCA) that does not provide information sufficient to determine whether the investor is a U.S. person or should otherwise be treated as holding a "United States Account" of the Issuer (a "Recalcitrant Holder"). The Issuer does not expect to be classified as an FFI that is subject to withholding under FATCA.
The FATCA regime is now in effect and will apply to "foreign passthru payments" (a term not yet defined) no earlier than 1 January 2017. This withholding would potentially apply to payments in respect of (i) any Notes characterised as debt (or which are not otherwise characterized as equity and have a fixed term) for U.S. federal tax purposes that are issued on or after the "grandfathering date", which is the date that is six months after the date on which
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final U.S. Treasury regulations defining the term foreign passthru payment are filed with the Federal Register, or which are materially modified on or after the grandfathering date and (ii) any Notes characterised as equity or which do not have a fixed term for U.S. federal tax purposes, whenever issued. If Notes are issued before the grandfathering date, and additional Notes of the same series are issued on or after that date, the additional Notes may not be treated as grandfathered, which may have negative consequences for the existing Notes, including a negative impact on market price.
The United States and a number of other jurisdictions have announced their intention to negotiate intergovernmental agreements to facilitate the implementation of FATCA (each, an "IGA"). Pursuant to FATCA and the "Model 1" and "Model 2" IGAs released by the United States, an FFI in an IGA signatory country could be treated as a "Reporting FI" not subject to withholding under FATCA on any payments it receives. Further, an FFI in a Model 1 IGA jurisdiction would not be required to withhold under FATCA or an IGA (or any law implementing an IGA) (any such withholding being "FATCA Withholding") from payments it makes (unless it has agreed to do so under the U.S. "qualified intermediary," "withholding foreign partnership," or "withholding foreign trust" regimes). The Model 2 IGA leaves open the possibility that a Reporting FI might in the future be required to withhold as a Participating FFI on foreign passthru payments and payments that it makes to Recalcitrant Holders. Under each Model IGA, a Reporting FI would still be required to report certain information in respect of its account holders and investors to its home government or to the IRS. The United States and Italy have entered into an agreement (the "US Italy IGA") based largely on the Model 1 IGA on 10 January 2014. Nevertheless the full impact of such an agreement on the Issuer and the Issuer’s reporting and withholding responsibilities under FATCA is – at this stage – not completely clear.
While not expected, if the Issuer is treated as an FFI that is subject to withholding under FATCA, the Issuer would expect to be treated as a Reporting FI pursuant to the US Italy IGA and does not anticipate being obliged to deduct any FATCA Withholding on payments it makes. There can be no assurance, however, that the Issuer will be treated as a Reporting FI, or that it would in the future not be required to deduct FATCA Withholding from payments it makes. Accordingly, the Issuer and financial institutions through which payments on the Notes are made may be required to withhold FATCA Withholding if (i) any FFI through or to which payment on such Notes is made is not a Participating FFI, a Reporting FI, or otherwise exempt from or in deemed compliance with FATCA or (ii) an investor is a Recalcitrant Holder.
If an amount in respect of FATCA Withholding were to be deducted or withheld from interest, principal or other payments made in respect of the Notes, neither the Issuer nor any paying agent nor any other person would, pursuant to the conditions of the Notes, be required to pay additional amounts as a result of the deduction or withholding. As a result, investors may receive less interest or principal than expected.
Whilst the Notes are in global form and held within the clearing systems, it is expected that FATCA will not affect the amount of any payments made under, or in respect of, the Notes by the Issuer, any paying agent, the depositary, common depositary or common safekeeper, given that each of the entities in the payment chain beginning with the Issuer and ending with the clearing systems is a major financial institution whose business is dependent on compliance with FATCA and that any alternative approach introduced under an IGA will be unlikely to affect the Notes. The documentation expressly contemplates the possibility that the Notes may go into definitive form and therefore that they may be taken out of the clearing systems. If this
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were to happen, then a non FATCA compliant holder could be subject to FATCA Withholding. However, definitive notes will only be printed in remote circumstances.
FATCA is particularly complex and its application is uncertain at this time. The above description is based in part on regulations, official guidance and model IGAs, all of which are subject to change or may be implemented in a materially different form.
TO ENSURE COMPLIANCE WITH IRS CIRCULAR 230, EACH TAXPAYER IS HEREBY NOTIFIED THAT: (A) ANY TAX DISCUSSION HEREIN IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY THE TAXPAYER FOR THE PURPOSE OF AVOIDING U.S. FEDERAL INCOME TAX PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER; (B) ANY SUCH TAX DISCUSSION WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) THE TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISER.
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SUBSCRIPTION AND SALE
Notes may be sold from time to time by the Issuer to any one or more of Intesa Sanpaolo S.p.A – Divisione IMI Corporate & Investment Banking, BNP Paribas, UniCredit Bank AG, Banco Bilbao Vizcaya Argentaria, S.A., Barclays Bank Ireland PLC, Barclays Bank PLC, Citigroup Global Markets Europe AG, Citigroup Global Markets Limited, Crédit Agricole Corporate and Investment Bank, Deutsche Bank Aktiengesellschaft, Goldman Sachs International, Mediobanca – Banca di Credito Finanziario S.p.A., MPS Capital Services Banca per le Imprese S.p.A., Morgan Stanley & Co. International plc, Natixis, Société Générale and Unione di Banche Italiane S.p.A. (the "Dealers"). The arrangements under which Notes may from time to time be agreed to be sold by the Issuer to, and subscribed by, Dealers are set out in a Dealer Agreement dated 24 July 2020 (the "Dealer Agreement") and made between the Issuer and the Dealers. If in the case of any Tranche of Notes the method of distribution is an agreement between the Issuer and a single Dealer for that Tranche to be issued by the Issuer and subscribed by that Dealer, the method of distribution will be described in the relevant Final Terms as "Non- Syndicated" and the name of that Dealer and any other interest of that Dealer which is material to the issue of that Tranche beyond the fact of the appointment of that Dealer will be set out in the relevant Final Terms. If in the case of any Tranche of Notes the method of distribution is an agreement between the Issuer and more than one Dealer for that Tranche to be issued by the Issuer and subscribed by those Dealers, the method of distribution will be described in the relevant Final Terms as "Syndicated", the obligations of those Dealers to subscribe the relevant Notes will be joint and several and the names and addresses of those Dealers and any other interests of any of those Dealers which is material to the issue of that Tranche beyond the fact of the appointment of those Dealers (including whether any of those Dealers has also been appointed to act as Stabilising Manager in relation to that Tranche) will be set out in the relevant Final Terms. Any such agreement will, inter alia, make provision for the form and terms and conditions of the relevant Notes, the price at which such Notes will be subscribed by the Dealer(s) and the commissions or other agreed deductibles (if any) payable or allowable by the Issuer in respect of such subscription. The Dealer Agreement makes provision for the resignation or termination of appointment of existing Dealers and for the appointment of additional or other Dealers either generally in respect of the Programme or in relation to a particular Tranche of Notes. The Dealer Agreement provides that the obligations of the initial purchasers to subscribe for Notes are subject to certain conditions precedent, including (among other things) receipt of legal opinions from counsel.
United States of America: Regulation S Category 1/2; TEFRA D or TEFRA C as specified in the relevant Final Terms or neither if TEFRA is specified as not applicable in the relevant Final Terms.
The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S.
The Notes are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the United States Internal Revenue Code and regulations thereunder.
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Each Dealer has agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that, except as permitted by the Dealer Agreement, it will not offer, sell or deliver Notes, (i) as part of their distribution at any time or (ii) otherwise until 40 days after the completion of the distribution of the Notes comprising the relevant Tranche, within the United States or to, or for the account or benefit of, U.S. persons, and such Dealer will have sent to each dealer to which it sells Notes during the distribution compliance period relating thereto a confirmation or other notice setting forth the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons.
In addition, until 40 days after the commencement of the offering of Notes comprising any Tranche, any offer or sale of Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act.
Prohibition of Sales to EEA and UK Retail Investors Unless the Final Terms in respect of any Notes specifies the "Prohibition of Sales to EEA and UK Retail Investors" as "Not Applicable", each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that it has not offered, sold or otherwise made available and will not offer, sell or otherwise make available any Notes which are the subject of the offering contemplated by this Base Prospectus as completed by the Final Terms (or are the subject of the offering contemplated by a Drawdown Prospectus) in relation thereto to any retail investor in the European Economic Area or in the United Kingdom. For the purposes of this provision the expression "retail investor" means a person who is one (or more) of the following: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, "MiFID II"); or
(ii) a customer within the meaning of Directive (EU) 2016/97 (as amended, the “Insurance Distribution Directive”), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II.
United Kingdom
Each Dealer has represented, warranted and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that:
(a) No deposit-taking: in relation to any Notes having a maturity of less than one year:
(i) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business ; and:
(ii) it has not offered or sold and will not offer or sell any Notes other than to persons:
(A) whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses; or
(B) who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses,
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where the issue of the Notes would otherwise constitute a contravention of Section 19 of the FSMA by the Issuer;
(b) Financial promotion : it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and
(c) General compliance: it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Notes in, from or otherwise involving the United Kingdom.
Republic of Italy
The offering of the Notes has not been registered with the Commissione Nazionale per la Società e la Borsa ("CONSOB") pursuant to Italian securities legislation and, accordingly, each Dealer has represented and agreed and each further Dealer appointed under the Programme will be required to represent and agree that it has not offered, sold or delivered, and will not offer, sell or deliver, any Notes in the Republic of Italy in an offer to the public, and that sales of the Notes in the Republic of Italy shall be effected in accordance with all Italian securities, tax and exchange control and other applicable laws and regulation.
Without prejudice to the paragraph entitled “Prohibition of Sales to EEA and UK Retail Investors”, each Dealer has represented and agreed that no copies of this Base Prospectus or of any other document relating to the Notes may be distributed in the Republic of Italy, except in circumstances falling within Article 1(4) of the Prospectus Regulation or Article 3(2) of the Prospectus Regulation and Article 34-ter, first paragraph, letter b) of CONSOB Regulation No. 11971 of 14 May 1999 (as amended from time to time) (“Regulation No. 11971”).
Any such offer, sale or delivery of the Notes or distribution of copies of the Base Prospectus or any other document relating to the Notes in the Republic of Italy must be:
(a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993 as amended (the “Italian Banking Act”), Legislative Decree No. 58 of 24 February 1998, CONSOB Regulation No. 20307 of 15 February 2018 (in each case, as amended from time to time) and any other applicable laws and regulations;
(b) in compliance with Article 129 of the Italian Banking Act, pursuant to which the Bank of Italy may request information on the issue or the offer of securities in the Republic of Italy and the relevant implementing guidelines of the Bank of Italy issued on 25 August 2015 (as amended on 10 August 2016); and
(c) in compliance with any other applicable laws and regulations or requirement imposed by CONSOB (including, but not limited to, Regulation No. 11971 or another Italian authority.
France
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that it has not offered or sold and will not
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offer or sell, directly or indirectly, Notes to the public in the Republic of France, and it has not distributed or caused to be distributed and will not distribute or cause to be distributed to the public in France, the Base Prospectus, the relevant Final Terms or any other offering material relating to the Notes and such offers, sales and distributions have been and will be made in the Republic of France only to (a) providers of investment services relating to portfolio management for the account of third parties (personnes fournissant le service d’investissement de gestion de portefeuille pour compte de tiers), and/or (b) qualified investors (investisseurs qualifiés), all as defined in, and in accordance with, Articles L.411-1, L.411-2 and D.411-1 of the French Code monétaire et financier.
Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended, the "FIEA"). Accordingly, each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer to sell any Notes in Japan or to, or for the benefit of, a resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organised under the laws of Japan) or to others for re-offering or resale, directly or indirectly, in Japan or to, or for the benefit of, any resident in Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, FIEA and other relevant laws and regulations of Japan.
Singapore
Each Dealer has acknowledged that this Base Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Dealer has represented, warranted and agreed that it has not offered or sold any Notes or caused the Notes to be made the subject of an invitation for subscription or purchase and will not offer or sell any Notes or cause the Notes to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, this Base Prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes, whether directly or indirectly, to any person in Singapore other than (i) to an institutional investor (as defined in Section 4A of the Securities and Futures Act (Chapter 289) of Singapore, as modified or amended from time to time (the "SFA")) pursuant to Section 274 of the SFA, (ii) to a relevant person (as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,
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securities or securities-based derivatives contracts (each term as defined in Section 2(1) of the SFA) of that corporation or the beneficiaries' rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:
(1) to an institutional investor or to a relevant person, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;
(2) where no consideration is or will be given for the transfer;
(3) where the transfer is by operation of law;
(4) as specified in Section 276(7) of the SFA; or
(5) as specified in Regulation 37A of the Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations 2018.
General
Each Dealer has represented, warranted and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that it has complied and will comply with all applicable laws and regulations in each country or jurisdiction in or from which it purchases, offers, sells or delivers Notes or possesses, distributes or publishes this Base Prospectus or any Final Terms or any related offering material, in all cases at its own expense. Other persons into whose hands this Base Prospectus or any Final Terms comes are required by the Issuer and the Dealers to comply with all applicable laws and regulations in each country or jurisdiction in or from which they purchase, offer, sell or deliver Notes or possess, distribute or publish this Base Prospectus or any Final Terms or any related offering material, in all cases at their own expense.
The Dealer Agreement provides that the Dealers shall not be bound by any of the restrictions relating to any specific jurisdiction (set out above) to the extent that such restrictions shall, as a result of change(s) or change(s) in official interpretation, after the date hereof, of applicable laws and regulations, no longer be applicable but without prejudice to the obligations of the Dealers described in the paragraph headed "General" above.
Selling restrictions may be supplemented or modified with the agreement of the Issuer. Any such supplement or modification may be set out in the relevant Final Terms (in the case of a supplement or modification relevant only to a particular Tranche of Notes) or in a supplement to this Base Prospectus.
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GENERAL INFORMATION
Listing and admission to trading
Application has been made for Notes issued under the Programme to be admitted to trading on the regulated market of the Luxembourg Stock Exchange and to be listed on the official list of the Luxembourg Stock Exchange. The Luxembourg Stock Exchange’s regulated market is a regulated market for the purpose of the Markets in Financial Instruments Directive (Directive 2014/65/EU, as amended).
However, Notes may be issued pursuant to the Programme which are admitted to listing, trading and/or quotation by such competent authority, stock exchange and/or quotation system as the Issuer(s) and the relevant Dealer(s) may agree or which are not admitted to listing, trading and/or quotation by any competent authority, stock exchange and/or quotation system.
The CSSF may at the request of the Issuer, send to the competent authority of another European Economic Area Member State (i) a copy of this Base Prospectus; and (ii) an Attestation Certificate.
Authorisation
The establishment of the Programme was duly authorised by a resolution of the Board of Directors of the Issuer dated 10 March 2014. The 2020 update of the Programme was duly authorised on 6 May 2019. The Issuer has obtained or will obtain from time to time all necessary consents, approvals and authorisations in connection with the issue and performance of the Notes.
Legal and Arbitration Proceedings
Save as disclosed in "Description of the Issuer-Litigation" starting on page 141 of this Base Prospectus, there are no governmental, legal or arbitration proceedings, (including any such proceedings which are pending or threatened, of which the Issuer is aware), which may have, or have had during the 12 months prior to the date of this Base Prospectus, a significant effect on the financial position or profitability of the Group.
Significant/Material Change
Save as described in the Q1 2020 Press Release, since 31 December 2019 there has been no material adverse change in the prospects of the Issuer or the Group nor since 31 March 2020 has there been any significant change in the financial performance or position of the Issuer and the Group.
Auditors
The consolidated financial statements of the Issuer as at and for the years ended 31 December 2018 and 2019 have been audited without qualification by PricewaterhouseCoopers S.p.A. ("PwC"), which was appointed as the Group’s new Auditors for a term of nine financial periods (2017-2025) by the Issuer’s Shareholders’ Meeting of 27 April 2017. PwC is authorised and regulated by The Italian Ministry of Economy and Finance ("MEF") and registered on the special register of auditing firms held by the MEF. The registered office of PwC is Via Monte Rosa 91, 20149 Milan, Italy.
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Documents on Display
Copies of the following documents (together, where appropriate, with English translations thereof may be inspected during normal business hours at the offices of the Fiscal Agent at 60 avenue J.F. Kennedy, L-1855 Luxembourg for 12 months from the date of this Base Prospectus:
(a) the by-laws (Statuto) of the Issuer;
(b) the audited consolidated financial statements of the Issuer for the years ended 31 December 2018 and 2019;
(c) the most recent annual consolidated financial information of the Issuer published from time to time, commencing with its audited annual consolidated financial statements as at and for the year ended 31 December 2019;
(d) the Agency Agreement;
(e) the Deed of Covenant;
(f) the Programme Manual (which contains the forms of the Notes in global and definitive form); and
(g) the Issuer-ICSDs Agreement (which is entered into between the Issuer and Euroclear and/or Clearstream with respect to the settlement in Euroclear and/or Clearstream of Notes in New Global Note form).
The audited consolidated financial statements of the Issuer for the years ended 31 December 2018 and 2019, which are incorporated by reference into this Base Prospectus, and the other documents incorporated by reference herein, will be available on the websites set forth in “Information Incorporated by Reference”. In addition, copies of the by-laws (Statuto) of the Issuer and the provisions for meetings of the noteholders will be available on the Issuer’s website (https://www.gruppo.acea.it/en).
Material Contracts
Save as disclosed in "Description of the Issuer – Material Contracts" starting on page 146 in this Base Prospectus, and any supplement hereto, neither the Issuer nor any of its Subsidiaries has entered into any contracts in the last two years outside the ordinary course of business that have been or may be reasonably expected to be material to their ability to meet their obligations to Noteholders.
Websites
The website of the Issuer is https://www.gruppo.acea.it/en. The information on https://www.gruppo.acea.it/en does not form part of this Base Prospectus, except where that information has been incorporated by reference into this Base Prospectus. Other than the information incorporated by reference, the content of the Issuer’s website has not been scrutinised or approved by the competent authority.
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Clearing of the Notes
The Notes have been accepted for clearance through Euroclear and Clearstream. The appropriate common code and the International Securities Identification Number in relation to the Notes of each Tranche will be specified in the relevant Final Terms. The relevant Final Terms shall specify any other clearing system as shall have accepted the relevant Notes for clearance together with any further appropriate information.
Issue Price and Yield
Notes may be issued at any price. The issue price of each Tranche of Notes to be issued under the Programme will be determined by the Issuer and the relevant Dealer(s) at the time of issue in accordance with prevailing market conditions and the issue price of the relevant Notes or the method of determining the price and the process for its disclosure will be set out in the applicable Final Terms. In the case of different Tranches of a Series of Notes, the issue price may include accrued interest in respect of the period from the interest commencement date of the relevant Tranche (which may be the issue date of the first Tranche of the Series or, if interest payment dates have already passed, the most recent interest payment date in respect of the Series) to the issue date of the relevant Tranche.
The yield of each Tranche of Notes set out in the applicable Final Terms will be calculated as of the relevant issue date on an annual or semi-annual basis using the relevant issue price. It is not an indication of future yield.
Potential Conflicts of Interest
Certain of the Dealers and their respective affiliates, including their parent companies, have engaged, and may in the future engage, in investment banking and, commercial banking transactions with, and may perform services for, or may have provided financing to, and/or other related transactions with the Issuer and its affiliates, including its parent company, and may in the future perform services for them, in each case in the ordinary course of business. Furthermore, certain of the Dealers and their affiliates may have positions, deal or make markets in the Notes issued under the Programme, related derivatives and reference obligations, including (but not limited to) entering into hedging strategies on behalf of the Issuer and its affiliates, investor clients, or as principal in order to manage their exposure, their general market risk, or other trading activities.
In addition, in the ordinary course of their business activities, the Dealers and their affiliates (including their parent companies) may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of the Issuer or the Issuer’s affiliates or any entity related to the Notes. Certain of the Dealers and their affiliates that have a lending relationship with the Issuer routinely hedge their credit exposure to the Issuer consistent with their customary risk management policies. Typically, such Dealers and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in the Issuer’s securities, including potentially the Notes offered hereby. Any such short positions could adversely affect future trading prices of the Notes offered hereby. The Dealers and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that
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they acquire, long and/or short positions in such securities and instruments. For the avoidance of doubt, the term "affiliates" includes also parent companies.
Furthermore, some of the Dealers, and their respective affiliates (including their parent companies), have extended certain loans to the Issuer and the net proceeds of the issue of the Notes may be used by the Issuer to repay such loans in whole or in part (as further described in "Use of Proceeds"). In addition, the Dealers expect to receive customary fees and commissions for the issuance of the Notes offered hereby.
In particular, certain of the Dealers and their respective affiliates (including their parent companies), have granted significant financing to Issuer and its parent and group companies and they are one of their main financial lenders.
The Legal Entity Identifier
The Legal Entity Identifier (LEI) code of the Issuer is 549300Q3448N041CTH56.
BNP Paribas Securities Services, Luxembourg Branch Information
BNP Paribas Securities Services Luxembourg Branch, being part of a financial group providing client services with a worldwide network covering different time zones, may entrust parts of its operational processes to other BNP Paribas Group entities and/or third parties, whilst keeping ultimate accountability and responsibility in Luxembourg.
Further information on the international operating model of BNP Paribas Securities Services, Luxembourg Branch may be provided upon request.
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REGISTERED OFFICE OF THE ISSUER
Piazzale Ostiense, 2 00154 Rome Italy
ARRANGERS
Intesa Sanpaolo S.p.A – BNP Paribas UniCredit Bank AG Divisione IMI Corporate & 10 Harewood Avenue Arabellastrasse 12 Investment Banking London NW1 6AA 81925 Munich Largo Mattioli, 3 United Kingdom Germany 20121 Milan Italy
DEALERS
Intesa Sanpaolo S.p.A – Divisione IMI Corporate Banco Bilbao Vizcaya Argentaria, S.A. & Investment Banking Ciudad BBVA Via Manzoni, 4 Edificio ASIA, Calle Sauceda, 28 20121 Milan 28050 Madrid Italy Spain
Barclays Bank Ireland PLC Barclays Bank PLC One Molesworth Street 5 The North Colonnade Dublin 2 Canary Wharf D02RF29 London E14 4BB Ireland United Kingdom
BNP Paribas Citigroup Global Markets Europe AG 10 Harewood Avenue Reuterweg 16 London NW1 6AA 60323 Frankfurt am Main United Kingdom Germany
Citigroup Global Markets Limited Crédit Agricole Corporate and Investment Bank Citigroup Centre 12, Place des Etats-Unis, CS 70052 Canada Square 92 547 Montrouge CEDEX Canary Wharf France London E14 5LB United Kingdom
Deutsche Bank Aktiengesellschaft Goldman Sachs International Mainzer Landstr. 11-17 Plumtree Court 60329 Frankfurt am Main 25 Shoe Lane Germany London EC4A 4AU United Kingdom
MPS Capital Services Banca per le Imprese S.p.A. Mediobanca – Banca di Credito Finanziario Via L. Pancaldo, 4 S.p.A. 50127 Firenze Piazzetta E. Cuccia, 1 Italy 20121 Milan Italy
Morgan Stanley & Co. International plc Natixis 25 Cabot Square 30 avenue Pierre Mendès-France Canary Wharf 75013 Paris London E14 4QA France United Kingdom
Société Générale Unione di Banche Italiane S.p.A
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29, Boulevard Haussmann Piazza Vittorio Veneto 8, 75009 Paris 24122 Bergamo France Italy
UniCredit Bank AG Arabellastrasse 12 81925 Munich Germany
FISCAL AGENT AND PAYING AGENT
BNP Paribas Securities Services, Luxembourg Branch 60 avenue J.F. Kennedy L-1855 Luxembourg
LEGAL ADVISERS
To the Issuer as to English and Italian law: To the Dealers as to English and Italian law:
White & Case LLP Clifford Chance Studio Legale Associato Piazza Diaz 2 Via Broletto 16 20123 Milan 20121 Milan Italy Italy
To the Issuer as to Italian tax law
Foglia & Partners Via dei Prefetti 17 00186 Rome Italy
AUDITORS TO THE ISSUER
PricewaterhouseCoopers S.p.A. Via Monte Rosa, 91 20141 Milan Italy
LUXEMBOURG LISTING AGENT
BNP Paribas Securities Services, Luxembourg Branch 60 avenue J.F. Kennedy L-1855 Luxembourg
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